MARKET MECHANISM, FAILURE + GOV INTERVENTION- MICROECONOMICS

Question 1

Signalling function

Answer 1

Provide information to buyers and sellers

Question 2

Allocative function

Answer 2

Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets with excess demand

Question 2

Incentive function

Answer 2

Provide reasons to alter economic behaviour, high prices provides a reason for firms to supply more

Question 2

Rationing function

Answer 2

Rising prices ration demand for a product, fewer goods demanded at every price

Question 3

Market failure

Answer 3

When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide the quantity or the good in general

Question 4

Missing market

Answer 4

Situation where there is no market because the functions of prices has broken down

Question 5

Private good

Answer 5

A good that is excludable, rivalrous and rejectable

Car, House, luxury items

Question 6

Public good

Answer 6

Non-excludable, non-rivalrous, non-rejectable

Roads, NHS

Question 7

Free riders

Answer 7

Those who benefit from resources, public goods and common pool resources do not pay for them

Question 8

Quasi-public good

Answer 8

A good that is semi-non rivalrous and excludable

Public transportation, parks, libraries

Question 9

Externality

Answer 9

Cost or benefit experienced by an uninvolved 3rd party

Question 10

Positive externality

Answer 10

An external benefit, occuring when the consumption or production of a good causes a benefit to a 3rd party, where social benefit is greater than private

Electric car = less pollution

Question 11

Negative externality

Answer 11

An external cost, occuring when consumption or production of a good causes a cost to a 3rd party, where social cost is greater than private cost

Smoking= = second hand smoke, strain on healthcare services

Question 12

Production externality

Answer 12

An externality resulting form the production of a good or service

Question 13

Consumption externality

Answer 13

An externality resulting from the from the consumption of a good or service

Question 14

Social benefit

Answer 14

The total benefit of an activity expressed as:

Social benefit= Private benefit + External benefit

Question 15

Merit good

Answer 15

Goods or services that are considered to be beneficial to individuals and society as a whole, (where the social benefits of consumption exceed private) but are often under-consumed in a free market economy

Question 16

Demerit goods

Answer 16

A good or service whose consumption is considered harmful to the consumer and society, (where the social costs of consumption exceed the private costs) value judgements are involved leading to an over consumption, however imperfect information leads to long term consequences

Question 17

Subsidy

Answer 17

-A payment made by the state or authority to producers for each unit of subsidised good

-Consumers subsidised, bus passes for child to get to school

Question 18

Social cost

Answer 18

The total cost of an activity expressed as:

Social cost = private costs + external cost

Question 19

Information problem

Answer 19

Occurs when people don’t possess or ignore the relevant information, due to myopic decision making or asymmetric information