theme 4.1.9 notes Flashcards
What is the definition of market failure?
Market failure occurs when the allocation of goods and services by a free market is not efficient.
True or False: Externalities can lead to market failure.
True
Fill in the blank: Public goods are non-____ and non-_____.
excludable; rivalrous
What is an example of a negative externality?
Pollution from a factory.
What is the purpose of government intervention in the case of market failure?
To correct inefficiencies and promote social welfare.
True or False: A monopoly can lead to market failure.
True
Fill in the blank: The Coase theorem states that private parties can negotiate solutions to externalities if property rights are _____ and transaction costs are _____ .
clearly defined; low
What is a positive externality?
A benefit that affects a third party who did not choose to incur that benefit.
What role does the government play in providing public goods?
The government provides public goods because the market may underprovide them due to non-excludability.
True or False: Asymmetric information can cause market failure.
True
Fill in the blank: A market characterized by a few firms dominating the market is known as _____ .
oligopoly
What is the concept of ‘social optimum’?
The level of output where social welfare is maximized.
What is the significance of ‘Pigovian taxes’?
They are taxes imposed to correct the negative externalities of a market activity.
True or False: Information asymmetry occurs when one party has more or better information than the other.
True
Fill in the blank: The ‘invisible hand’ concept was introduced by _____ .
Adam Smith
What is the primary effect of subsidies on merit goods?
Subsidies make merit goods more affordable, increasing consumption.
What does the term ‘free rider problem’ refer to?
Individuals benefit from resources, goods, or services without paying for them.
True or False: Market power can lead to higher prices and reduced output.
True
Fill in the blank: The measure of consumer and producer surplus combined is known as _____ .
total welfare
What is the role of regulation in a market economy?
To prevent market failures and protect consumers and the environment.
What is meant by ‘allocative efficiency’?
Allocative efficiency occurs when resources are distributed in a way that maximizes total welfare.
True or False: Government failure occurs when government intervention leads to a more inefficient allocation of resources.
True
Fill in the blank: The term ‘externality’ refers to a situation where a third party is affected by the _____ of an economic transaction.
actions
What is the difference between ‘private goods’ and ‘public goods’?
Private goods are excludable and rivalrous, while public goods are non-excludable and non-rivalrous.
