Pack 9

Question 1

Define Market Failure

Answer 1

When there is too much or too little of a good being produced and/or consumed compared with the socially optimal level of output.

Question 2

Define externality

Answer 2

When there are external costs/benefits that arise from a transaction that are felt by people other than the producer and consumer.

Question 3

Define third party

Answer 3

People or units that are affected by a transaction they did not directly make.

Question 4

Give example of private cost, private benefit and external benefit for farming

Answer 4

Private cost - fertilizers and pesticides
Private benefit - free milk and eggs from animals
External benefit - food for consumers

Question 5

How to calculate MSC and MSB

Answer 5

MSC = MPC + external costs

MSB = MPB + external benefits

Question 6

Give an example of a product associated with negative externalities and explain why they are a cause of market failure

Answer 6

Cigarettes - they cause more problems for the NHS.

Question 7

Give an example of a product associated with positive externalities and explain why they are a cause of market failure

Answer 7

Vaccines - they provide herd immunity.

Question 8

Externality diagrams

Answer 8

Positive:
•MPC=MSC
•MPB shifts right to MSB
•Q1–> Q2

Negative
•MPB=MSB
•MPC shifts left to MSC
•Q2<—Q1