T1: LS17 - Externalities

Question 1

Market failure definition

Answer 1

Refers to the misallocation of resources where too much/ too little is provided compared to the socially optimum level of output.

Question 2

External costs

Answer 2

Refers to the costs to a third party not involved in the transaction (buying, selling and making of G&S)

Question 3

External benefits

Answer 3

A benefit to a third party not involved in the transaction (producing, selling G&S)

Question 4

Types of Market failure

Answer 4

P - Public goods: underprovision of public goods
I - Information gaps: causes over/ underproduction
E - Externalities: society is impacted

Question 5

Externalities definition

Answer 5

Externalities: refer to the indirect costs or benefits to uninvolved economic agents which occur from an economic activity. There is no compensation paid from this.

Question 6

Public goods market failure definition:

Answer 6

Refers to the under provision of public goods because these are unprofitable. This causes a low quality of life since it is hard to finance this despite their benefits.

Question 7

Information gaps

Answer 7

Refers to differences in the information supplied to the producers and consumers resulting in irrational decisions and misallocations in the quantity of goods and services produced.

Question 8

Incur costs definitions

Answer 8

To experience a cost of something usually unpleasant due to actions which you have taken

Question 9

Pareto efficiency defintion

Answer 9

Refers to a point/state in the economy where all economic agents needs are being met and the market has succeeded.

Question 10

What are the two types of market failure?

Answer 10

Complete market failure: occurs when the market cannot supply any of the goods and services needed.
Partial market failure: markers can provide G&S but this is under provided or at the incorrect price.