The market mechanism, market failure and government intervention in markets ( Micro )

Question 1

What are the four functions prices perform in markets?

Answer 1

• Signalling function
• Incentive function
• Rationing function
• Allocative function

Question 2

What is “market failure”?

Answer 2

It occurs whenever the market mechanism or price mechanism yields a resource misallocation

Question 3

What’s the difference between complete market failure and partial market failure?

Answer 3

• Complete market failure: When a good isn’t provided by the free market
• Partial market failure: When a good is provided by the free market, but at an inefficient price or quantity

Question 4

What’s the free-rider problem?

Answer 4

When people decide to gain the benefits of a good or service while refusing to pay for it

Question 5

What’s the “tragedy of the commons”?

Answer 5

When a given resource or good is over-consumed due to it being free ( e.g farmers having their cows eat all the grass first before other farmers get the chance to do so )

Question 6

What is an externality?

Answer 6

An impact of an economic transaction on a third party

Question 7

What’s a “negative externality”?

Answer 7

A negative externality is generated when a firm or individual making a decision to produce a good or service doesn’t have to pay the full cost of the decision

Question 8

What’s a “positive externality”?

Answer 8

When an individual or firm making a decision doesn’t make full benefit of the decision

Question 9

LOOK AT A EXTERNALITY DIAGRAM TO UNDERSTAND IT

Answer 9

JUST LOOK AT THEM

Question 10

What’s a “merit good”?

Answer 10

• A good with positive externalities in consumption

Question 11

What’s a “demerit good”?

Answer 11

• Consuming demerit goods yields negative externalities