Section 5 - Market Failure Flashcards
What is an externality?
An externality is a cost or benefit that affects a third party who is not directly involved in an economic transaction
What is the difference between positive and negative externalities?
Positive externalities provide external benefits to others. Negative externalities impose external costs
Give an example of a positive production externality?
A firm investing in Research and Development which leads to technological Advancements that benefit other businesses
Give and example of a negative production externality
A factory polluting a river harming the local wildlife and residents
Give an example of a positive consumption externality
Vaccination which reduces the spread of disease and benefits the whole population
Give an example of a negative consumption externality
Smoking which leads to passive smoking health issues for everyone
How do externalities cause market failure
Externalities cause market failure as the price mechanism doesn’t represent the true social costs/ benefits of a product
What is the social cost of a good
The total cost to society including both private and external costs
What is the social benefit of a good
The total benefit to society including both private and external benefits
How does the government intervene to correct negative externalities
Taxes, regulation, pollution permits, or bans to reduce harmful activities
How does the government intervene to encourage positive externalities?
Subsidies, public provision, or advertising to encourage beneficial activities
What is the difference between private cost and external cost?
Private cost is the cost to the producers/consumers directly but external costs affect the third party
What is the difference between private benefit and external benefit
Private benefit is received by the consumer/producer but external benefit impacts others
How does a tax on negative externalities help reduce market failure?
Increases the
What is an externality?
An externality is a cost or benefit incurred by a third party who did not choose to incur that cost or benefit.
True or False: Externalities can only be negative.
False
What is a merit good?
A merit good is a product or service that is deemed beneficial for individuals and society, often under-consumed if left to the market.
Fill in the blank: A ______ good is a good that is over-consumed and may lead to negative effects on society.
demerit
What is a public good?
A public good is a product that is non-excludable and non-rivalrous, meaning it is available for everyone to consume without reducing its availability to others.
Which of the following is an example of a public good? A) Private school B) National defense C) A concert
B) National defense
What is imperfect information?
Imperfect information occurs when all parties in a transaction do not have access to the same information, leading to inefficient outcomes.
True or False: Perfect information is critical for efficient markets.
True
What does inequity refer to in economic terms?
Inequity refers to the unequal distribution of resources and opportunities among individuals in an economy.
Fill in the blank: Factors of production that cannot move easily between industries are referred to as ______ factors.
immobile
What is a negative externality?
A negative externality is a harmful effect experienced by third parties not directly involved in a transaction.
Which of the following is an example of a demerit good? A) Vaccines B) Alcohol C) Education
B) Alcohol
What is the primary reason for government intervention in the case of merit goods?
To encourage consumption and ensure that these goods are available to everyone.
True or False: Public goods can lead to the free-rider problem.
True
What is the free-rider problem?
The free-rider problem occurs when individuals benefit from resources, goods, or services without paying for them, leading to under-provision of those goods.
Name one way governments can address negative externalities.
By imposing taxes or regulations.
What is a positive externality?
A positive externality is a beneficial effect experienced by third parties not directly involved in a transaction.
Fill in the blank: ______ goods are often funded by the government due to their nature of being non-excludable.
Public
What is an example of imperfect information in the market?
Consumers not knowing the true quality of a product before purchase.
True or False: Mobility of factors of production increases market efficiency.
True
What is one consequence of immobile factors in the economy?
It can lead to unemployment in certain sectors.
What role do merit goods play in society?
They contribute to social welfare and improve overall quality of life.
Which of the following is a characteristic of a demerit good? A) Beneficial for society B) Over-consumed C) Always subsidized
B) Over-consumed
What is one way to correct positive externalities?
By providing subsidies to encourage consumption.
Fill in the blank: The government may intervene in markets to correct ______ and ______.
externalities; inequities
What is the impact of imperfect information on consumers?
It can lead to suboptimal purchasing decisions.
True or False: All public goods are provided exclusively by the government.
False
What is one challenge in providing public goods?
Ensuring that everyone contributes to their funding.
What does it mean for a good to be non-rivalrous?
One person’s use of the good does not reduce its availability for others.
Name a common example of a negative externality.
Pollution from factories.
What can lead to inequity in an economy?
Differences in income, wealth, and access to resources.
Fill in the blank: ______ is a key issue when discussing the allocation of public goods.
Free-rider problem
What is the effect of subsidies on merit goods?
They increase consumption and accessibility.
True or False: A positive externality can exist in the education sector.
True
What is an example of an immobile factor of production?
Skilled labor that cannot easily transition to another industry.
What is the relationship between externalities and market failure?
Externalities can lead to market failure by causing a misallocation of resources.
What is an example of a merit good?
Education or healthcare.
Fill in the blank: The concept of ______ refers to the benefits that accrue to third parties from an economic transaction.
positive externality
Which government action can address the free-rider problem?
Implementing taxes to fund public goods.
What is the main characteristic of demerit goods?
They are considered harmful and are often over-consumed.
True or False: Public goods are always provided at a profit.
False
What is the significance of non-excludability in public goods?
It makes it difficult to charge consumers directly for the good.
What is market failure?
Market failure occurs when the allocation of goods and services by a free market is not efficient.
True or False: Market failure can occur due to externalities.
True
Fill in the blank: A ________ is a cost or benefit incurred by a third party who did not choose to incur that cost or benefit.
externality
What are public goods?
Public goods are goods that are non-excludable and non-rivalrous, meaning they can be consumed by many people without reducing availability to others.
Which of the following is NOT a cause of market failure? A) Externalities B) Public goods C) Perfect competition
C) Perfect competition
What is asymmetric information?
Asymmetric information occurs when one party in a transaction has more or better information than the other party.
True or False: Market power can lead to market failure.
True
What role do government interventions play in correcting market failures?
Government interventions aim to improve market outcomes by addressing inefficiencies, such as through regulation, taxation, or provision of public goods.
Fill in the blank: A __________ occurs when a market fails to produce a socially optimal quantity of a good or service.
market failure
What is the difference between positive and negative externalities?
Positive externalities benefit third parties, while negative externalities impose costs on them.
