Market Mechanism, Market Failure and Government Intervention in Markets

Question 1

What are externalities?

Answer 1

The costs and benefits to a third party created by economic agents when undertaking their activities.

Question 2

What are negative externalities?

Answer 2

Those costs to a third party that are not included in the price of the economic activity.

Question 3

What are positive externalities?

Answer 3

Those benefits to a third party that are not included in the price of the economic activity.

Question 4

What are private costs?

Answer 4

Those costs of consuming or producing goods or services that that must be paid for by those that use them e.g. the individual or a firm.

Question 5

What are social costs?

Answer 5

Those costs of consuming or producing goods or services that are paid for by society.

Question 6

What are private benefits?

Answer 6

Benefits of consuming or producing goods or services that are received by an economic unit e.g. the individual or a firm, these are paid for

Question 7

What are social benefits?

Answer 7

Those benefits of consuming or producing goods or services that are received by society.

Question 8

What is the free-rider problem?

Answer 8

The acknowledgement that social benefits include private benefits but the difference between private and social benefits are unpaid for.

People.are benefiting from resources they didn’t purchase causing market failure.

Question 9

When social benefits are greater than private benefits what externality do we have?

Answer 9

Positive externalities.

Question 10

Why do positive and negative externalities lead to market failure?

Answer 10

the private consumer or producer is not paying for, or receiving, the full cost or benefit of the economic activity.

Question 11

What is welfare loss and gain?

Answer 11

The cost and/or benefit to society.

Question 12

What is allocative in/efficiency?

Answer 12

A market that does or doesn’t efficiently meet the needs and wants of society.

Question 13

What is market failure?

Answer 13

Occurs when a market leads to a misallocation of resources - making it unable to meet the needs of society.

Question 14

What is government intervention?

Answer 14

The government takes action to remedy allocatively inefficient markets - eliminate market failure.

Question 15

Why might there be a misallocation of resources?

Answer 15

Public goods
Externalities
Merit and demerit goods
Monopoly power
Other market imperfections
Inequalities in the distribution of income and wealth

Question 16

What is complete market failure?

Answer 16

No market whatsoever (missing market).

Goods and services will not be supplied to the market as firms will not receive revenue for supplying the product.

Question 17

What is Partial market failure?

Answer 17

When a market exists but there is a misallocation of resources.

Goods and services will be supplied but in the wrong amounts.

Question 18

A phrase synonymous with market failure is…

Answer 18

Allocative inefficiency.

Question 19

What does inequitable mean?

Answer 19

Unfair or unjust.

Question 20

Who said: “equal opportunity and economic empowerment is both morally right and good in economics because discrimination, poverty and ignorance restrict growth.”

Answer 20

Bill Clinton

Question 21

What’s the difference between income and wealth?

Answer 21

Income - measured by the flow of earnings of people.
Wealth - measured by the stored financial assets of people.
As Income flows from the stock of assets a nations income and wealth are correlated.

Question 22

What does the distribution of income and wealth analyse?

Answer 22

The geographical, occupational, gender etc. differences for individuals and households.
- An individual’s ability to consume goods ands services depends on their income.

Question 23

How does the government influence the distribution of income?

Answer 23

Redistributes income from richer to poorer members of society. They use progressive (increases the proportion of tax as workers earn more) and regressive tax (the opposite).

Question 24

What is the UK welfare system?

Answer 24

The National Health Service and Jobseekers Allowance that redistribute income to the less well off in society through welfare benefits.