Microeconomics, Part 5- The Market Mechanism, Market Failure and Government Intervention in Markets

Question 1

Market failure definition:

Answer 1

Occurs when the free market, left alone, fails to deliver an efficient allocation of resources. The result is a loss of economic welfare. This results in economic inefficiency.

Question 2

Missing market definition:

Answer 2

A situation in which there is no market because the functions of price have completely broken down. Complete market failure results in a missing market. Partial market failure is where a market exists but contributes to resource misallocation.

Question 3

What are the main causes of market failure?

Answer 3

• Positive and negative externalities
• Merit and demerit goods
• Public goods
• Monopoly and other market imperfections
• Inequalities in the distribution of income and wealth
• Factor immobility and causing unemployment
• Imperfect information

Question 4

Public good definition:

Answer 4

A good that possesses the characteristics of non-excludability, non-rivalry and non-rejectable in consumption

Question 5

Non-excludability definition:

Answer 5

Once provided, no person can be excluded from benefiting

Question 6

Non-rivalry definition:

Answer 6

Consumption of the good by one person does not reduce the amount available for consumption by others.

Question 7

Quasi-public good definition:

Answer 7

A good that has some of the qualities of a public good but does not fully posses all three required characteristics

Question 8

Private good definition:

Answer 8

A good that is excludable, rejectable and rival in consumption

Question 9

Complete market failure definition:

Answer 9

Where the free market fails to produce a product at all. i.e. the case of a public good. If public goods were not provided by the government there would be market failure. This is because of the free rider problem

Question 10

Free-rider definition:

Answer 10

A person or organisation which receives benefits that others have paid for without making any contribution themselves.

Question 11

Free-market definition:

Answer 11

Market where the government does not intervene

Question 12

Externalities definition:

Answer 12

Costs or benefits that spill over the third parties external to a market transaction

Question 13

Positive externality definition:

Answer 13

A positive spillover effect to third parties of a market transaction; social benefits exceed private benefits

Question 14

Negative externality definition:

Answer 14

A negative spillover effect to third parties of a market transaction; social costs exceed private costs

Question 15

Marginal private cost definition:

Answer 15

The cost to an individual or firm of a market transaction

Question 16

Marginal external cost:

Answer 16

The spillover cost to third parties of an economic transaction

Question 17

Marginal social cost:

Answer 17

The full cost to society of an economic transaction, including private and external costs

Question 18

What makes up marginal social cost?

Answer 18

Marginal private cost and marginal external cost

Question 19

Marginal private benefit definition:

Answer 19

The benefit to an individual or firm of an economic transaction

Question 20

Marginal external benefit definition:

Answer 20

The spillover benefit to third parties of an economic transaction

Question 21

Marginal social benefit definition:

Answer 21

The full benefit of an economic transaction, including private and external benefits

Question 22

What makes up marginal social benefit?

Answer 22

Marginal private benefit and marginal external benefit

Question 23

Incidence of tax definition:

Answer 23

The proportion of the tax that is passed onto the consumer. If most of the tax is passed onto the consumer then the incidence of tax is said to be high. When demand is price inelastic, the incidence of tax tends to be high