Topic 8 - Market Failure

Question 1

Merit Good;

Answer 1

Under consumed if left to the FM
Unaware of long term benefits
Information gaps
Society benefits form consumption

Healthy lifestyle - (Fewer hospital visits)

Question 2

Demerit Good;

Answer 2

Over consumed if left to the FM
Unaware of harm of consumption
Information gap
Negative impacts to 3rd party (society)

Smoking - (second hand smoking)

Question 3

Public Good;

Answer 3

Non-excludable
Non-rival
Non-payers can’t be prevented from consuming

Free rider issue - lighthouse

Question 4

Non-excludable

Answer 4

Non payers can’t be prevented from consuming

Lighthouse - (free riders use without paying)

Question 5

Non-rival;

Answer 5

One persons enjoyment of a good/service does not diminish another persons

Radio broadcast

Question 6

Positive Production Externality

Answer 6

Production has a wider benefit to society
Social benefit > social cost

Under consumed if left to FM
MPC > MSC

MPB=MSB

Question 7

Positive Consumption Externality

Answer 7

Individual consumption has a wider benefit to society
Social benefit > Private benefit

Under consumed if left to the FM
MSB > MPB

MSC=MPC

Question 8

Negative Production Externality

Answer 8

Supply of a good/service had negative impacts to society
Social cost > Private cost

Overproduced if left to FM
MSC > MPC

MSB =MPB

Question 9

Negative Consumption Externality

Answer 9

Consumption is too great
Causes a wider negative impact on society
Individual benefit > Social benefit

Over consumed If left to FM
MPB > MSB

MSC=MPC