Unit 2: Microeconomics - Market Failure

Question 1

Market Failure

Answer 1

Failure of the market to allocate its resources effectively

Question 2

Overallocation

Answer 2

Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction

Question 3

Underallocation

Answer 3

Occurs when too few resources are allocated to the production of a good, relative to what is socially most desirable, resulting in underallocation

Question 4

Different views of Market Failure

Answer 4

Externalities
Lack of public good
Common access resources and threat to sustainability

Question 5

Externality

Answer 5

A cost or benefit that arises from production and falls on a third party

Question 6

4 Types of Externalities

Answer 6

(-) externality of production
(-) externality of consumption
(+) externality of production
(+) externality of consumption

Question 7

Social Optimum

Answer 7

What is best from societies point of view. Determined by the achievement of allocative effficency

Question 8

Negative externalities of production

Answer 8

A negative externality caused by production activities, leading to a situation where marginal social costs are greater than marginal private costs
EX/ Congestion, Pollution, Carbon Emissions

Question 9

Negative externality of production, therefore we deal with the ___ curve

Answer 9

Supply

Question 10

Negative externality of production is the result of ____ of resources in the market to the production of the good or service

Answer 10

overallocation

Question 11

Which way does the ___ curve shift when there is a negative externality of production?

Answer 11

The supply curve shifts left in order to decrease the supply

Question 12

Ways the government can correct negative externalities of production

Answer 12

Government intervention
Market based policies
- taxes
   - imposing taxes on each unit of output this increasing the price of production and decreasing the supply
- tradable permits

Question 13

Advantages and disadvantages of market based taxes and permits (in regards to NEGATIVE externalities of PRODUCTION)

Answer 13

ADVANTAGES:
- Internalize external costs
- Incentives producers to find cleaner technologies
DISADVANTAGES:
- practicality
- gov’ts much oversee permit trades therefore costing the government

Question 14

Advantages and disadvantages of government regulations (in regards to NEGATIVE externalities of PRODUCTION)

Answer 14

ADVANTAGES:
- simpler
- easier to implement
DISADVANTAGES:
- externality is not absorbed by producer
- no market based incentives, therefore can’t reduce the size of the externality

Question 15

Negative externalities of consumption

Answer 15

A negative externality caused by consumption activities, leading to a situation where MSB

Question 16

Negative externality of consumption, therefore we deal with the ____ curve

Answer 16

Demand, which shifts the demand curve DOWN

Question 17

Demerit goods

Answer 17

Goods that are considered to be undesirable for society and are over provided by the market. Reasons for overprovision may be ignorant of harmful effects

Question 18

Solutions or attempts at fixing negative externalities of consumption

Answer 18

- Gov't regulations
  Limit or ban consumption
- Advertisement
  Educate people about the harms of G/S
- Market-based policies
  Impose an indirect tax on G/S

Question 19

Advantages and disadvantages of government regulations (in regards to NEGATIVE externalities of CONSUMPTION)

Answer 19

ADVANTAGES:
- Direct involvement in limiting or banning G/S
DISADVANTAGES:
- Loss of tax revenue
- could effect large corporations (job loss)

Question 20

Advantages and disadvantages of advertising (in regards to NEGATIVE externalities of CONSUMPTION)

Answer 20

ADVANTAGES:
- Simple
- Educates people
- controlled message
DISADVANTAGES:
- costs money
- may not be effective enough to reduce externality

Question 21

Advantages and disadvantages of market-based policies (in regards to NEGATIVE externalities of CONSUMPTION)

Answer 21

ADVANTAGES:
- Indirect taxes preferred measure
- Internalize externality
DISADVANTAGES:
- Difficult to asses who and what is effected
- habit forming good and service often elastic demand