Topic 5

Question 1

when does market failure occur

Answer 1

when market fails to produce social optimum outcome

Question 2

when does government failure occr

Answer 2

when gov fails to correct market failure or produces an inefficient outcome

Question 3

what is the public interest view

Answer 3

it is the role of the government to prevent market failure and the negative consequences of rent seeking behaviour by monpolists, polluters and other

Question 4

what is the private interest view

Answer 4

it is the role of the private market to prevent gov failure and negative consequences of rent seeking behaviour

Question 5

what is rent seeking behaviour

Answer 5

when economic agents take advantage of being in a strong bargaining position to catch extra PS or CS which they would not otherwise have

Question 6

define externalities

Answer 6

benefits or costs that effect someone that isn’t directly involved with the production or consumption of a g/s

Question 7

what is the difference between price cost/benefit and social cost/benefit

Answer 7

private: costs and benefit borne by the individual/firm deciding to consume or produce a g/s
social: total cost/benefit by borne the whole society because of production or consumption of g/s

Question 8

in terms of social and private b and c how is the standard market modeled

Answer 8

social cost = private cost

social benefit = private benefit

Question 9

how are externalities modelled

Answer 9

social cost =/= private cost (2 MC curves)

social benefit =/= private benefit

Question 10

what is a positive externality and why does DWL occur (draw model)

Answer 10

social benefits of consumption or production are greater than the private benefit (MSB > MPB)

DWL for each unit of production = the difference between MSB and MSC. Total DWL for all units UNDER PRODUCED is the sum of the differences for each unit.

Question 11

what is a negative externality and why does DWL occur (draw model)

Answer 11

when the social cost of consumption or production is greater than the private cost (MSC > MPC)

DWL for each unit of over production = the difference between MSC and MSB. Total DWl for all units overproduced is the sum of the differences for each unit.

Question 12

what are the 4 ways externalities can be rectified

Answer 12

1. self correction
2. command and control (prohibition/compulsory)
3. Price and Quantity Controls (quotas and licenses)
4. Taxes and Subsidies (internalise the externality but can lead to shortage/surplus)
5. Instating Property Rights (creating markets where there were non - pollution permits)

Question 13

what are the issues with each way of correcting externalities

Answer 13

Command and Control: pos ext may have costs and neg ext may have benefits.
Price Control: can lead to shortage/surplus
Quantity Control: only work if Q is too high and can create shortage

Question 14

how can self correction of externalities occur (what is the coase theorem)

Answer 14

stakeholders and consumers can choose to boycott/pressure firm by not buying that product
coase: if things are easily done (low transaction cost), private bargaining will result in an efficient solution to the problem of externalities

Question 15

define rivalry and excludability

Answer 15

rivalry: when one person’s consumption of a unit of good means no one else can consume it
excludability: anyone who does not pay for a good cannot consume it

Question 16

define each type of good and give an example

Answer 16

private (R +E) - food
club (E + NR) - netflix
common resources (NE + R) - ocean fish
public (NE + NR) - parks

Question 17

in relation to pyblic goods what is the free rider problem and how does this create market failure

Answer 17

if i can consume this without paying for it, then i wont

no profit incentive to produce so gov must step in to prduce through surveys and cost benefit analysis

Question 18

in relation to common resources what is the tragedy of the common and how does this create market failure

Answer 18

although available to all people, it will eventually run out and no individual is interested in withholding their use of the resource so requires regulation

Question 19

how can the tragedy of the commons be solved

Answer 19

private property ownership
discussion between players
gov can tax or set quotes/issue permits (fishing)

Question 20

how can a subsidy and a tax rectify externalities (draw graph)

Answer 20

subsidy - increases quantity so rectifies pos ext

tax - decreases quantity so rectifies neg ext

Question 21

how are producers effect by direct implementation of a subsidy or tax

Answer 21

1. subsidy directly to producer = fall in marginal private cost
2. tax directly on producer = rise in marginal private cost

Question 22

how are consumers affected by directly implementation of a subsidy and a tax

Answer 22

1. subsidy directly given to consumer = movement down the MPB curve (fall in price)
2. tax directly on consumers = movement up the MPB curve (rise in price)

Question 23

in the secondary market explain the tradability of permits (for pollution)

Answer 23

when demand is high, price increases so there is a higher likeliness to sell. Those who have few alternatives but to pollute will have higher willingness to pay. Those who have more alternatives can be easily induced to sell permits.