Week 6 - Market failure and government intervention

Question 1

What is productive efficiency and is it a benefit of a competitive market?

Answer 1

• output produced at a minimum average cost
• economic problems of how to produce
• benefit of a competitive market

Question 2

What is allocative efficiency and is it a benefit of a competitive market?

Answer 2

• output produced where marginal benefit to society equals the marginal cost to society
• economic problem of what or how much to produce
• surplus is maximised
• benefit of competitive market

Question 3

List some reasons for intervention

Answer 3

• maintaining the legal system or rule of law
• merit goods
• equity
• stabilisation policy
• market failure

Question 4

What is the difference between excludability and Rivalry

Answer 4

• A good or service is excludable whereby a person can be prevented from using it
• A good or service is characterised by rivalry whereby one person’s use diminishes other people’s uses

Question 5

What are the four types of goods when taking into consideration excludable and rivalry?

Answer 5

Private goods ( yes & yes) 
Club goods (yes & no) 
Common resources (no & yes)
Public goods (no & no)

Question 6

What is externality?

Answer 6

• where a person’s activity effects the welling being of a bystander
• yet the bystander neither pays nor receives any compensation for that effect

Question 7

What are some private solutions to externalities?

Answer 7

• moral codes & social sanctions
• charitable organisations
• integrating different types of businesses
• contracts (The case theorem) between interested parties but not easy with large numbers

Question 8

What is the Coase theorem?

Answer 8

• if private parties can bargain costlessly over the allocation of resources
• then they can solve the problems of externalities on their own
• independent of the initial allocation of property rights

Question 9

What are some of the conditions for coarse theorem?

Answer 9

• no transaction costs

- effective legal system that can implement and enforce contracts

Question 10

What are some government solutions to externalities?

Answer 10

• command and control policies
• market based instruments
  e. g. price & quantity based instruments