Theme 1: Market Failure

Question 1

3 types of market failures

Answer 1

Externalities, under provision of public goods and information gaps.

Question 2

Private benefit

Answer 2

the benefit received by the consumer of a good or service

Question 3

Social benefit

Answer 3

Social benefits are private benefits plus external benefits.

Question 4

Social optimum position

Answer 4

MSC = MSB and it is the point of maximum welfare

Question 5

negative externalities

Answer 5

MSC>MPC of supply

Question 6

deadweight welfare loss

Answer 6

The output where social costs > private benefits

Question 7

positive externalities

Answer 7

MSB>MPB

Question 8

welfare gain

Answer 8

the excess of social benefits over costs

Question 9

How do indirect taxes correct market failure?

Answer 9

Reduce the quantity of demerit goods consumed through raising the price of the good or the firm internalises the cost.

Question 10

How do subsidies correct market failure?

Answer 10

Encourage the consumption of merit goods

Question 11

How does regulation correct market failure?

Answer 11

Bans could be enforced for the harmful good and reduce consumption or completely remove consumption. Bans are only useful when MSC > MPB.

Question 12

How does providing the good directly correct market failure?

Answer 12

The government providing public goods corrects the under provision of something in the free market.

Question 13

How does providing information correct market failure?

Answer 13

Consumers can make informed economic decisions.

Question 14

How do property rights correct market failure?

Answer 14

This encourages innovation because entrepreneurs can create new ideas which are protected.

Question 15

How do personal carbon allowances correct market failure?

Answer 15

Firms can pollute up to a certain amount and trade what they do not use.

Question 16

Non-excludable

Answer 16

A characteristics of some goods where it is not possible to exclude someone from using a good.

Question 17

Free rider problem

Answer 17

People who do not pay from the good still benefit.

Question 18

Why are public goods underprovided

Answer 18

Difficult to measure value consumers get so hard to put price on

Question 19

Features of a private good

Answer 19

Rival and excludable

Question 20

quasi-public goods

Answer 20

A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an under allocation of resources. eg roads

Question 21

symetric information

Answer 21

Both consumer and producer have perfect market information.

Question 22

asymetric information

Answer 22

Unequal knowledge between consumers and producers.

Question 23

principal-agent problem

Answer 23

a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him