Micro Economics - Market Failure

Question 1

common pool resources

Answer 1

rivalrous - consumption reduces availability for someone else
non-excludable - the resource can be used abundantly without restrictions
examples: fish being over fished, fossil fuels and global warming, timber sales and loss of biodiversity

Question 2

tragedy of the commons

Answer 2

story of common pool resources
fertile grass is rivalrous because what one animal eats is not available for another
non-excludable because a herder can not exclude animals from eating it

Question 3

marginal social benefit (MSB)

Answer 3

benefits to society from consuming one more unit of a good

Question 4

marginal private benefit (MPB)

Answer 4

benefits to consumers for consuming one more unit of a good

Question 5

marginal social cost (MSC)

Answer 5

costs to society of producing on more unit of a good

Question 6

marginal private cost (MPC)

Answer 6

costs to producers of producing one more unit of a goos

Question 7

socially optimum output

Answer 7

MSC = MSB

Question 8

externality

Answer 8

actions of consumers and producers that give rise to negative or positive side-effects on other people who are not part of these actions, and whose interests are not taken into consideration

Question 9

unsustainable production

Answer 9

production that uses resources un sustainably - they may be overused, depleted or degraded

Question 10

sustainable resource

Answer 10

resources are used at a rate that allows them to reproduce themselves and not become degraded or depleted

Question 11

negative production externalities

Answer 11

external costs created by producers MSC>MPC

Question 12

Pigouvian tax

Answer 12

imposing a tax on negative production externalities in order to correct the externality. MSC = MPC + tax

Question 13

Carbon tax

Answer 13

a tax per unit of carbon emissions of fossil fuels, it encourages firms to produce more efficiently

Question 14

traceable permits

Answer 14

permits that are issued to firms by a government authority or international body and can be traded in the market. the objective is to limit the total amount of pollutants emitted by firms.

Question 15

collective self governance

Answer 15

a solution to the use of common pool resources where users take control of the resources and use them in a sustainable way (counter idea of the tragedy of commons. it proposes that users of resources can communicate with each other, resulting in rules about the use of resources along with sanctions for violations of the rules

Question 16

negative consumption externalities

Answer 16

external costs created by consumers MPB>MSB

Question 17

demerit goods

Answer 17

goods that are considered to be undesirable for consumers, but are over provided by the government
example: cigarettes, alcohol, gambling

Question 18

positive production externalities

Answer 18

external benefits created by producers MSC

Question 19

positive consumption externality

Answer 19

external benefits created by consumers MSB>MPB

example: education

Question 20

merit goods

Answer 20

goods that are held to be desirable for consumers, but which are under provided by the market

Question 21

public good

Answer 21

non-rivalrous - consumption by one person does not reduce consumption by someone else
non-excludable - it is not possible to exclude someone from using the good

Question 22

free rider problem of public goods

Answer 22

if it is free, a producer does not receive profit. as a result it is not produced on a free market. it is either produced by direct provision or contracting out

Question 23

asymmetric information

Answer 23

situations where buyers and sellers do not have equal access to information. in some cases buyers may have more information then sellers, in others sellers may have more information than buyers
it is split into two sections: adverse selection and moral hazard

Question 24

adverse selection

Answer 24

situation where one party in a transition has more information about the quality of the product being sold than the other party

Question 25

moral hazard

Answer 25

situation here one party takes risks, but does not face the full cost of the risks because the full costs of the risks are Bourne by the other party