Unit 1 Continued

Question 1

Negative externality definition

Answer 1

When a third party is negatively affected by a market transaction. Eg. Football match causing littering and congestion.

Question 2

Examples of negative externalities caused by the alcohol industry

Answer 2

• Absenteeism (absence from work due to alcohol related illness)
• Reduced productivity in the workplace
• health problems cost the NHS
• road accidents

Question 3

How to solve the negative externalities of the alcohol industry

Answer 3

• put a higher tax on alcohol
• have an information campaign
• introduce strict laws on alcohol
• minimum pricing

Question 4

Positive externalities definition

Answer 4

A product which has a positive impact on the third party. Eg. The dentist

Question 5

Examples of positive externalities

Answer 5

• gyms
• schools
• private healthcare

Question 6

Subsidies definition

Answer 6

They refer to direct payments that governments provide businesses to offset some of their operating costs. They encourage production and consumption.

Question 7

Minimum pricing definition

Answer 7

Minimum pricing is a price floor set by the government. It can be used to discourage the consumption of a product. Eg. Alcohol

Question 8

Maximum pricing definition

Answer 8

When a price is set which the market will not be allowed to go above. Implemented to increase consumption levels. Eg, elderly care, rent controls

Question 9

Carbon trading definition

Answer 9

A system of limiting carbon emissions through granting firms permits to emit a certain amount of carbon.

Question 10

The rationing function definition

Answer 10

When resources are scarce, demand exceeds supply and prices are driven up. Higher prices ration who can buy the products. Eg. More people want houses so price goes up. This causes a decrease in demand. Increase in rental market.

Question 11

The signalling function

Answer 11

Price changes send contrasting messages to consumers and producers about whether to enter or leave a market. Eg. Prices increase so more suppliers and less consumers.

Question 12

The incentive function

Answer 12

Something that motivates a producer or consumer to follow a course of action or to change behaviour. Higher prices provide an incentive to existing producers to supply more to possibly have more revenue and increased profit.

Question 13

Market failure definition

Answer 13

Happens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss.

Question 14

3 characteristics of a pure public good

Answer 14

• non excludability
• non rivalrous consumption
• non rejectable

Question 15

Non excludable definition

Answer 15

The benefits derived from a pure public good cannot be confined solely to those who have paid for it (free rider problem)

Question 16

Non rival consumption definition

Answer 16

Consumption by one consumer does not restrict consumption by other consumers. Marginal cost of supplying a public good to an extra person is zero.

Question 17

Non rejectable définition

Answer 17

Collective supply of a public good for all means that it cannot be rejected by people, eg. Nuclear defence

Question 18

Quasi public good definition

Answer 18

Near public good. Has many but not all characteristics of a public good. Eg. Beach

Question 19

Merit goods definition

Answer 19

Goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service. Leads to social benefits.

Question 20

The principle agent definition

Answer 20

An arrangement in which one entity legally appoints another to act on its behalf (could be the government if the principle is under a certain age, eg. Education)

Question 21

Asymmetric information definition

Answer 21

A type of market failure that exists when one individual or party has more info than another individual or party, and uses that advantage to exploit another party.