Week 9: Externalities, Public Goods & Common Resources

Question 1

What is a market?

Answer 1

• An institution that involves the exchange of goods and services AND the rights (property rights) to use them.
• Individuals with purely selfish motives mutually benefit from exchange.

Question 2

What is market failure?

Answer 2

• Situations where the market fails to achieve an efficient outcome, or where efficient, the outcome is
deemed to be socially undesirable.

Question 3

What is government failure?

Answer 3

• Situations where the government fails to achieve an efficient outcome or redress a market failure, or where efficient, the outcome is deemed to be socially undesirable.

Question 4

Causes of Market Failure (Negative Externality):

Answer 4

An uncompensated cost born by a third party:
• Chlorofluorocarbons (CFCs)
• Greenhouse effect
• Noise pollution

Question 5

Causes of Market Failure (Positive Externality):

Answer 5

An uncompensated benefit born by a third party:
• Education
• Health and personal hygiene
e.g. immunisation

Question 6

Types of Externalities:

Answer 6

Producer on Producer: (Bee-keeper located next to apple grower)
Producer on Consumer: (Impact of noise from factory on residential areas)
Consumer on Consumer: (Smoking restaurant)