Social welfare and Market Failure

Question 1

Maximisation of social welfare or a society’s welfare

Answer 1

welfare refers to the feeling of contentment or well-being from the production and consumption of goods and services.

maximisation occurs when the quantity of goods and services produced from scarce resources results in the achievement of production effiecncy and alloctive efficiency.

Question 2

production efficieny

Answer 2

implies that resources are efficiently used in the production of goods and services. where ac is minimised/lowest where mc intersects ac.

if production (in)efficiency is not achieved welfare loss occurs

Question 3

allocative efficiency

Answer 3

implies that goods and services which consumers desire are neither underproduced nor overproduced.

overproduction (surpluses) or underproduction (shortage) results in a reudction in welfare or loss of welfare

Question 4

third party

Answer 4

defined as those who are neither consumers nor producers of a good or service in a particular market.

Question 5

merit goods and services

Answer 5

those where the social benefit exceeds the private benefit

usually underproduced by producers, so the government takes responsibilty for the provision of these goods.

healthcare(coach), eduaction (vet)

Question 6

demerit goods

Answer 6

where the social cost exceeds the private cost.

cigarettes- second hand smoking addiction, alcohol indirect taxes implented by the goveernent to discourage the use of these overproduced goods

Question 7

What is market failure?

Answer 7

is the inability of the market to allocate resources efficiently to maximise the welfare of society. This occurs when the quantity of a good or service produced in a market is not productively or allocatively efficient

Question 8

causes of market failure

Answer 8

• monopoly
• postive or negative externalities
• non-provision of public goods and services

Question 9

as long as externalities EXSIST

Answer 9

allocative efficiency will not be achieved and market failure will occur.

Question 10

monopoly

Answer 10

monopolies have control over prices and output, therefore they can restrict output (underproduce) causing the market price to rise (overprice)

Question 11

non-rivalrous and non-excludable

Answer 11

it can be consumed by more than one person without affecting its availability to other consumers

that consumers use the good or service without paying for it, can use the good without income as a factor

Question 12

public goods and merit goods cause market failure because

Answer 12

these goods or services cannot be provided accurately by the market mechanism (interactions of demand and supply) as they result in free riders. FREE RIDERS ARE INDIVIDUALS WHO CONSUME GOODS AND SERVICES FREE CHARGE. Therefore, private firms are unwilling to produce these goods as such resources are not allocated to their production.

Question 13

positive externalities

Answer 13

the benefits incurred by a third party from the consumption or production of a good or service by an individual

healthcare public good and merit goods

Question 14

negative externalities

Answer 14

disadvantages or costs incurred by a third party from the consumption or production of a good or service by an individual

alcohol- demerit good private good

Question 15

negative and postive externalities cause market failure because

Answer 15

the market mechanism ignores externalities. As such goods which generate positive externalities are overpriced and underproduced. While goods that generate negative externalities are underpriced and overproduced.

Question 16

methods of correcting market failure associated with EXTERNALITIES

Answer 16

1. Indirect taxation and subsidies- placed on goods that generate negative externalities to decrease prodcuction. Subsidies- to increase production of goods that generate positive externalities to reduce the cost of production
2. nationalisation- monopoly ALSO the government takes over a company and produces the quantity of goods and services to achieve allocative efficiency
3. a ban on the product- the government can do this to goods that cause negative externalities, banning the production of guns or illegal drugs

Question 17

consequences of market failure

Answer 17

micro-economic consequences such as overpricing, underpricing, overproduction, underproduction and inefficient use of resources

macro-economic consequences such as retrenchment, unemployment, rise in poverty, economic depression, decline in the provisions for social welfare.