1.3 Market failure

Question 1

1.3.1 A)
What is market failure

Answer 1

Market failure occurs when there is a failure to allocate scare resources effeciently causing net loss in welfare

Question 2

1.3.1 B)
What are the types of market failure

Answer 2

Externalites
Under-provision of public goods
infomation gap

Question 3

1.3.1 B)
What is exterbalites

Answer 3

the cost or benifit a third party recives from an economic transaction outside of market mechanisms (price). leading to under or over production where resocues arent allocated efficently,

Question 4

1.3.1 B)
What is under-provision of public goods

Answer 4

public goods are non-rivialous and non executable meaning they are “under-provsion) by the priv sector due to freedom rider problerm. Market is unable to ensure enough goods produced

Question 5

1.3.1 B)
What is infomation gap

Answer 5

Govt may not have access to all info about the true costs & benifits. so resources are not allocated to max welfare.

Question 6

1.3.2 A)
What is private cost

Answer 6

cost of production of goods and servies that are paided for by third parties

Question 7

1.3.2 B)
What is private benifit

Answer 7

Benifit to consumer upon comsumption

Question 8

1.3.2 A)
What is social cost

Answer 8

Private cost + external cost

Question 9

1.3.2 B)
What is social benifit

Answer 9

private benifit + external benifit

Question 10

1.3.2 A)
What is external cost

Answer 10

neg Impact on people not involved in the transaction/ production

Question 11

1.3.2 B)
What is external benifit

Answer 11

pos Impact on people not involved in the transaction/ production

Question 12

1.3.2 C/D)
ALL THE DIAGRAMS IN UR BOOK FOR EXTERNALITES

Question 13

1.3.2 C/D)
Marginal cost/benifit

Answer 13

is the cost / benifit of producing / consuming one extra unit.

Question 14

1.3.2 C/D)
Welfare loss/ gain

Answer 14

Area of triangle

Question 15

1.3.2 C/D)
he distinction between market equilibrium and social
optimum position

Answer 15

Market equilibrium is where supply meets demand at a given price, optimizing efficiency within the market, while social optimum ensures resources are allocated to maximize overall societal welfare, accounting for externalities and equitable distribution.

Question 16

1.3.3 A)
What is a public good

Answer 16

Non rivialous and non-excludable

Question 17

1.3.3 A)
define non-rivialous and non-excludable

Answer 17

r- the consumption of the g/s doesnt reduce the benifit derived from the g/s for another person

e- cannot be excluded

Question 18

1.3.3 A)
How does a private good differ from a public good

Answer 18

they are rivalous and excludable

Question 19

1.3.3 B )
What is the freedom rider problem

Answer 19

people who dont pay for g/s who still get the benifit
therefore they dont pay due to rational decision making leading firms to not produce public goods leads to govt needing to supply them as they normally carry positive externalalites.

Question 20

1.3)
Merit vs Demerit goods

Answer 20

Merit gas high external benifits > indivdual benifits and they tend to be under produced in free market

demerit opposite

Question 21

1.3.4 A)
What is Symmetic infomation

Answer 21

This is where consumers and producers have the same level of infomation

Question 22

1.3.4 A)
What is Asymmetric infomation

Answer 22

This is where consumers and producers dont have the same level of infomation.

For example if a consumer hides a crash to insurance they will get a cheaper price leading to the producer to act irrationally in comparsion if they had symmetric infomation.

Question 23

1.3.4 B)
What are the effects of imperfect infomation

Answer 23

Lack of info leads to irrational decsion marking.

leads to over consumption of demerit goods consumed at priv optimuim not social = allocative ineff / misallocation of resources

under consmption of merit goods as full benifits are not known

govt tries to reduce infomation gaps.