1.5

Question 1

what is market failure?

Answer 1

when the market is unable to efficiently allocate scarce resources to meet the needs of society

Question 2

when will there be allocative inefficiency?

Answer 2

always in practice and it’s the government’s role to eliminate market failure by intervening

Question 3

what are externalities?

Answer 3

the costs and benefits to a third party created by economic agents when undertaking their activities

Question 4

what are externalities thought of as?

Answer 4

spill over effects due to production and consumption they can lie outside of the market price and cause market failure

Question 5

What are negative externalities?

Answer 5

costs to a third party not included in the economic activity eg pollution

Question 6

what are positive externalities?

Answer 6

benefits to a third party not included in the economic activity eg vaccines

Question 7

what are private benefits/costs

Answer 7

the spill over costs/benefits to firms or individuals of an economic transaction

Question 8

what are external benefits/costs?

Answer 8

the spill over costs/benefits to third parties of an economic transaction

Question 9

what is dead weight welfare loss?

Answer 9

total change in social welfare due to an externality

Question 10

what do production externalities impact?

Answer 10

the supply curve

Question 11

what do consumption externalities impact?

Answer 11

the demand curve

Question 12

what is the social optimum?

Answer 12

best option for society

Question 13

what is MPB
MSB
MPC
MSC

Answer 13

Marginal Private Benefit
Marginal Social Benefit
Marginal Private Cost
Marginal Social Cost

Question 14

give an eg of negative production externality

Answer 14

pollution from a factory

Question 15

give an eg of a negative consumption externality

Answer 15

smoking and drinking

Question 16

give an eg of a positive production externality

Answer 16

in work training and R&D

Question 17

what is a demerit and merit good?

Answer 17

good/bad products provided both privately and publically

Question 18

what does the government intervene to address?

Answer 18

allocative inefficiency through taxing and subsidising externalities

Question 19

what are the 2 types of economies?

Answer 19

command and mixed

Question 20

what is a command economy?

Answer 20

only the public sector is used for provision eg North Korea

Question 21

what is a mixed economy?

Answer 21

public and private sectors for decisions eg UK

Question 22

what are the 4 methods of government intervention?

Answer 22

regulation
legislation
indirect taxation/excise duty
education and advertising

Question 23

what is regulation?

Answer 23

applying rules to firms/organisations by government/trade associations stopping consumers being exploited through false advertising

Question 24

what is legislation?

Answer 24

harmful products being banned by law and policies implemented eg vape ban

Question 25

what are the positives and negatives of legislation?

Answer 25

+ clear standards and known consequences - difficult to enforce and penalties not deterring

Question 26

what is indirect taxation/excise duty?

Answer 26

an inland tax on the sale or production of specific goods usually demerit

Question 27

what is education and advertising?

Answer 27

educating consumers about what they can do helping them be savvy and protect themselves alongside other methods

Question 28

when does government failure occur?

Answer 28

when a policy intervention leads to a deepening of a market failure or even worse a new failure may arise

Question 29

what are the 4 types of government failure?

Answer 29

distortion of price signals excessive admin costs information failures unintended consequences

Question 30

what is distortion of price signals?

Answer 30

when the government creates incentives to influence the behaviour of firms/individuals

Question 31

what do distortion of price signals create?

Answer 31

markets that wouldn’t survive without government support which distorts the free working of the market leading to distorted prices

Question 32

what can distorted prices mean for the government?

Answer 32

they end up creating inefficiencies rather than correcting them eg minimum prices signalling to producers to supply more

Question 33

what are excessive admin costs as a cause of government failure?

Answer 33

admin costs can mean that the benefits are outweighed by the costs, this can occur as government bureaucracy leads to higher costs

Question 34

what are information failures as a cause of government failure?

Answer 34

provision of information ensures that economic units can maximise decisions when consuming and producing goods and services. However information used by the government can be inaccurate due to poor research or an inability to predict the future. This delivers the wrong signals to markets meaning decision making is flawed

Question 35

what are unintended consequences as a cause of government failure?

Answer 35

policy interventions have effects that are unanticipated or unintended eg targets for treating patients leading to a reduction in the quality of care and therefore more deaths