Unit 5- Market Mechanism Failure And Goverment Intervention

Question 1

Signalling function of prices

Answer 1

Prices provide information to buyers and sellers

Question 2

Incentive function of prices

Answer 2

Prices create incentives for people to alter their economic behaviour for example a higher price creates and incentive for firms to supply more of s good or service supply increase to match demand

Question 3

Define rationing function of prices

Answer 3

Rising prices ration demand for a product reduces excess demand

Question 4

Define allocative function of prices

Answer 4

Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into market in which there is excess demand

Question 5

Define market failure

Answer 5

When the market mechanism leads to a misallocation of resources in the economy either completing failing to provide a good or just the wrong quantity

Question 6

Define missing market

Answer 6

No market as price function of prices has broken down

Question 7

Define private good

Answer 7

A good such as an orange that is excludable and rival

Question 8

Define public good

Answer 8

Non excludable non rival

Question 9

Define quasi public good

Answer 9

A good which is not fully non rival and/or where it is possible to exclude people form consuming the product

Question 10

Define externality

Answer 10

A public good in the case of an external benefit or a public bad in the case of an external cost that is paid for by 3rd party

Question 11

Define positive externality or external benifit

Answer 11

When consumption or production of a good causes benefit to a 3rd party where social benifit it greater than private benefit

Question 12

Define negative externality or external cost

Answer 12

Occurs when consumption or production of a good causes costs to a third party where social cost is greater than private cost

Question 13

Define production externality

Answer 13

An externality generated in the course of producing a good or service which can be positive or negative

Question 14

Define consumption externality

Answer 14

An externality generated in the course of consuming a good or service

Question 15

Social benefit define

Answer 15

The total benefit of an activity including external benefit as well as the private benefit.

Social benefit=private benefit+ external benefit

Question 16

Define merit good

Answer 16

A good such as healthcare which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good

Question 17

Define subsidy

Answer 17

A payment made by the government or another authority to producers for each unit of a subsided good they produce or for consumers to Mae things cheaper eg bus pass

Question 18

Define demerit good

Answer 18

A good such as tobacco for which the social costs of consumption exceed the private costs. Value judgments are involved in deciding that a good is demerit good

Question 19

Define social cost

Answer 19

The total cost of an activity including the external cost as well as the private cost.

Social cost = private cost + external cost

Question 20

Define information problem

Answer 20

Occurs when people make the wrong decisions because they don’t posses or they ignore relevant information often short sights about the fiture

Question 21

Define price ceiling

Answer 21

Price at which is it illegal to trade above

Question 22

Define price floor

Answer 22

A price at which is it illegal to trade below

Question 23

Define government failure

Answer 23

Occurs when the government intervention reduces economic welfare leading to an allocation of resources that is worse than the free market outcome