market failure and externalities 1.3.1 and 1.3.2

Question 1

externalities

Answer 1

An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism

Question 2

Under-provision of public goods

Answer 2

• Public goods are non-rivalry and non-excludable, meaning they are underprovided by the private sector due to the free-rider problem.
• The market is unable to ensure enough of these goods are provided.
• One of the best examples of a public good is ​streetlights​.

Question 3

Private costs/benefits

Answer 3

the costs/benefits to the individual participating in the economic activity. The demand curve represents private benefits and the supply curve represents private costs.

Question 4

Social costs/benefits

Answer 4

the costs/benefits of the activity to society as a whole.

Question 5

External costs/benefits

Answer 5

the costs/benefits to a third party not involved in the economic activity. They are the difference between private costs/benefits and social costs/benefits.

Question 6

merit good

Answer 6

A merit good is a good with external benefits, where the benefit to society is greater than the benefit to the individual. These goods tend to be underprovided by the free market.

Question 7

demerit good

Answer 7

A demerit good is a good with external costs, where the cost to society is greater than the cost to the individual. They tend to be over-provided by the free market.