Microeconomics LS17-23

Question 1

What is market failure?

Answer 1

Where too much or too little of a good is produced and/or consumed compared with the social optimum level of output.

Question 2

What is an external cost?

Answer 2

Cost to the 3rd party that is not involved in the making, buying/ selling and consumption of a specific good/ service.

Question 3

What is an external benefit?

Answer 3

A benefit to the 3rd party that is not involved in the making, buying/ selling and consumption of a specific good/ service

Question 4

What is a public good?

Answer 4

A good that is both non-rivalrous and non-excludable, provide for free use by public

Question 5

What is a private good?

Answer 5

A good that is sold by companies to satisfy consumer needs and wants.

Question 6

What is non-rivalrous?

Answer 6

Consumption of a product that doesn’t prevent another person from consuming that product.

Question 7

What is non-excludable?

Answer 7

Once a good is provided, it is impossible to stop people from using it.

Question 8

What is a private cost?

Answer 8

Any cost that a person or firm pays in order to buy or produce goods and services.

Question 9

What is a private benefit?

Answer 9

Benefits derived by an individual or firm directly involved in a transaction either as buyer or seller.

Question 10

What is the free-rider problem?

Answer 10

Type of market failure that occurs because everybody is able to benefit from them.
Problem because while not paying for the good, they may continue to access it.
Thus, the good is likely to be under provided or not provided at all.

Question 11

What does the free-rider problem lead to?

Answer 11

Leads to market failure as no revenue is earned.
Using it but not paying for it.
This is why there is no public good in the private sector, within a free market firms have a profit motive.

Question 12

What does social benefits mean?

Answer 12

Social benefits= private benefits + external benefits

Question 13

What is social costs?

Answer 13

Social costs= Private costs + external costs

Question 14

What is a positive externality?

Answer 14

When social benefits doesn’t equal private benefits, since external benefits are present.
If external benefits are present, there will be an underconsumption/ underproduction in a free market.

Question 15

What is a negative externality?

Answer 15

When socials costs doesn’t equal private costs, since external costs are present.
If external costs are present, there will be an overconsumption/ overproduction of it in a free market.

Question 16

What is social optimum level?

Answer 16

Occurs where all external benefits and external costs are accounted for.

Question 17

Why will externalities cause market failure?

Answer 17

If the price mechanism doesn’t take account of social costs and benefits of production and consumption.

Question 18

What is social welfare cost?

Answer 18

A loss as a result of too much or too little production and consumption of a good or service.

Question 19

What is the maximum price?

Answer 19

Price set below the market equilibrium price by the government.

Question 20

What is the minimum price?

Answer 20

Price set above the market equilibrium price by the government.

Question 21

What is the guaranteed minimum pricing scheme?

Answer 21

A scheme which excess supply from a minimum price is purchased by the government.
The purpose is to protect producer incomes.

Question 22

What is a tradable pollution permit?

Answer 22

A limit (cap) set on the total amount of pollution firms are allowed to emit over a period of time.
Permits can be traded- tradable pollution permits.
If firms pollute below the levels set, they can be sold.
If firms breaks the pollution limit, they will face fines unless they purchase pollution permits.

Question 23

Advantages of maximum prices.

Answer 23

Prices are lowered for consumers

Question 24

Advantages of minimum prices.

Answer 24

1) In agricultural markets, food stability is increased
2) Can reduce consumption of demerit goods (e.g. alcohol)
3) Producer incomes protected in agricultural markets

Question 25

Advantages of emission trade schemes.

Answer 25

1) Incentive given to invest in pollution reducing technology
2) Cleaner firms rewarded and less environmentally firms punished
3) Unused permits can be sold or banked, further incentive to reduce carbon emissions
4) Revenue can be raised by selling permits, rather than giving away for free, funds can be used to invest in green technology

Question 26

What is regulation?

Answer 26

A rule or law enacted by the government that must be followed by economic agents.

Question 27

Disadvantages of maximum prices

Answer 27

1) Shortage created (distributed on first come first serve which is deemed unfair)
2) Black market may emerge
3) Costs of enforcement (opportunity cost)
4) Difficult to set prices at right level. May be an info gap which leads to price being too low or too high
5) In rental market, producer surplus decreases. Less money to invest and maintain property, long term decline in quality of housing stock.

Question 28

Types of government intervention.

Answer 28

Taxes, subsides, minimum and maximum prices and regulations

Question 29

Disadvantages of minimum prices.

Answer 29

Excess supply created
Higher prices for consumers. Lower consumer surplus.

Question 30

Disadvantages of emission trading schemes

Answer 30

1) Information gap whereby too many (no incentives to reduce pollution) or too little reduce international competitiveness) permits given out
2) Cost of operating and monitoring trading schemes
3) producers may pass on added costs to consumers (for inelastic goods, they become more expensive)
4) If permits given for free, missed opportunity cost to raise government revenue
5) Competitor firms (US and China) not currently subjective to emissions trading schemes, increases their relative competitiveness
6) volatile prices, causes uncertainty for businesses

Question 31

How regulation aims to correct market failure. (Advantages)

Answer 31

1- Provides an incentive to change behaviour towards the socially optimum level of output
2- If correctly implemented, this leads to the removal of a welfare cost (or welfare gain for positive externalities)

Question 32

Disadvantages of regulation.

Answer 32

1) Cost : administration and enforcement
2) Setting the right level of regulation can be difficult (info gap)
3) May encourage black market activity
4) Unintended consequences may arise (e.g. firms decide to move to other countries with less strict regulation)

Question 33

What is a guaranteed minimum pricing scheme?

Answer 33

Where the surplus output created is purchased by a government agency at the minimum price.

Question 34

Advantages of minimum pricing schemes.

Answer 34

1) Producers incomes increase or stabilise. Greater investment and employment
2) Greater security for food supply
3) Surplus can be stockpiled and used as aid

Question 35

Disadvantages of minimum pricing schemes.

Answer 35

1) Surpluses may be sold overseas at lower prices. This could be damaging to farmers in developing countries that are likely to struggle to compete.
2) Opportunity cost of government finances (may have to raise taxes or cut gov spending in other areas)
3) Difficult to set prices at right level (info gap)
4) Storage and security costs for stockpiles

Question 36

Examples of a command

Answer 36

1) Bans
2) Limits
3) Caps
4) Compulsory actions

Question 37

Examples of control

Answer 37

1) Enforcement
2) Punishment

Question 38

What is government failure?

Answer 38

When government intervention designed to correct a market failure results in a less efficient allocation of resources.

Question 39

How is government failure caused?

Answer 39

1) Unintended consequences (e.g. prohibition, high taxes on cigarettes)
2) Distortion of price signals
3) excessive administration costs
4) information gaps