1.5 Market Failure and Government Intervention

Question 1

Define External Cost

Answer 1

The negative effect of an exchange to the third party that is ignored by the price mechanism

Question 2

Define Private Cost

Answer 2

The cost of a firm producing a good

Question 3

Define Social Cost

Answer 3

A combination of the External Cost and the Private Cost

Question 4

Define External Benefit

Answer 4

The positive effect on the third party

Question 5

Define Private Benefit

Answer 5

The positive effect on the third party

Question 6

Define Social Benfeit

Answer 6

A combination of the External and Private benefit

Question 7

Does the graph for Social Cost show overconsumption or underconsumption?

Answer 7

Overconsumption

Question 8

Does the graph for Social Benefit show overconsumption or underconsumption?

Answer 8

Underconsumption

Question 9

Give 3 ways in which the government can intervene to stop overconsumption

Answer 9

Taxation
Minimum Age
Reducing Desirability (e.g. pictures on cigarettes)

Question 10

Give 2 ways in which the government can affect underconsumption?

Answer 10

Subsidies

University Loans

Question 11

Define Market Failure

Answer 11

Market models that make assumptions and so aren’t reliable or effectively allocated, causing over or underconsumption

Question 12

Give the 4 causes of Market Failure

Answer 12

External Costs aren’t taken into account
Price mechanism doesn’t work in market with no competition
Some essential goods like healthcare are under consumed on the free market
When there is a lack of information about products

Question 13

Define Regulation

Answer 13

The government imposing rules on production and sale with laws and fines

Question 14

Define Legislation

Answer 14

Banning of harmful products

Question 15

Define Taxation as a method of government intervention

Answer 15

Increasing the price of a product, deterring its purchase and supply

Question 16

Define Subsidy as a method of government intervention

Answer 16

Increasing supply by reducing the cost for producers or consumers

Question 17

Define Voluntary Agreements as a method of government intervention

Answer 17

An agreement between a firm and the government

Question 18

Define Free Market

Answer 18

A market based on supply and demand where prices are set freely between consumer and producer with no government intervention

Question 19

Define Government Failure

Answer 19

Where the government intervention in a market fails and creates an inefficiency or leads to a misallocation of resources

Question 20

Define Bureaucracy

Answer 20

Paperwork (AKA red tape)

Question 21

How does Bureaucracy lead to Government Failure?

Answer 21

Taxpayers money is being wasted employing people to fill out paperwork

Question 22

Give 4 causes of Government Failure

Answer 22

Excessive Bureaucracy
Distortion of price signals
Unintended Consequences
Information Gaps