market failure

Question 1

why does market failure occur

Answer 1

too much or too little production or consumption compared to socially optimal level of output

Question 2

sources of market failure (5) ENIMS

Answer 2

externalities
non provision of public goods (free rider problem)
imperfect market information
moral hazard
speculation and market bubbles

Question 3

non-core sources of market failure (2) MF

Answer 3

monopolies and oligopolies
factor immobilities

Question 4

what is the role of markets

Answer 4

allocate scarce resources

Question 5

types of market failure 2

Answer 5

• production of too many or too little goods (partial market failure)
• missing markets (complete market failure)

Question 6

how do producers and consumers measure private benefits

Answer 6

Measured by the satisfaction a consumer receives from a good or service, or the profit a producer earns from selling it.

Question 7

Private sector vs. their concerns on Social Costs & Benefits

Answer 7

Private sector concern only private cost and private benefits, they do not take into
account of external cost and external benefits

Question 8

what is the result of private sector mainly caring about private benefit (2)

Answer 8

goods with social benefits can be under-provided due to ignored benefits
goods with social costs can be over-provided due to ignored costs

Question 9

what does the demand curve represent in market failure diagrams

Answer 9

Marginal private benefit (additional benefit from one more unit of
consumption)

Question 10

what does the supply curve represent in market failure diagrams

Answer 10

Marginal private cost (additional cost from one more unit of
production)

Question 11

difference between welfare loss and dead-weight loss

Answer 11

deadweight loss is a specific type of welfare loss, its a cause of welfare loss. welfare loss is the overall decrease in social well-being, deadweight loss is the overall decrease in social well being DUE TO market inefficiencies

Question 12

causes of welfare loss (4)

Answer 12

Deadweight loss (market inefficiencies)
Externalities (unpriced costs or benefits)
Income inequality
Changes in quality of goods and services

Question 13

what does “MPC>MSC, assumed MB = MPB = MSB” indicate

Answer 13

indicates a situation where private production decisions might not align with the best outcome for society. helps policy-makers.

Question 14

why are goods with external costs overconsumed

Answer 14

the private costs are considered by producers and not the external costs, firms will over-produce as they consider a cheaper cost of production

Question 15

use of marginal analysis

Answer 15

the difference btwn social cost and social benefit changes as the level of output changes, this can be shown

Question 16

why are public goods under-provided (2)

Answer 16

• Private sector does not want to provide public goods because they cannot make
  profit as public goods are non excludable.
• Due to their non-excludable naturepeople wouldn’t be incentivized to pay if they could enjoy them for free, free rider problem occurs

Question 17

tragedy of the commons

Answer 17

occurs when common pool resources are used in production in an unsustainable way, creating negative externalities and harming society no incentive for firms to reduce production levels as they seek to maximise profits.

Question 18

how does tragedy of the commons cause partial market failure

Answer 18

external costs like pollution prevents future generations from benefiting in the same way

Question 19

solution to free rider problem (2)

Answer 19

1) Government directly provides public goods and everyone contributes through taxes
2) Changing from pure public goods to non pure public goods.

Question 20

causes of information failure (4)

Answer 20

Asymmetric information
Hidden information
Adverse selection
Moral hazard

Question 21

what is adverse selection in terms of information failure

Answer 21

(when buyers or sellers disproportionately consume a product due to hidden information) like sick people are morel likely to look for health insurance, generating costs for producers

Question 22

The significance of information gaps.

Answer 22

information failure

Question 23

consequences of principle agent problem (3)

Answer 23

• moral hazard / misrepresentation
• Shirking
• over-consumption (agent might use the principal’s resources)

Question 24

Consequences of Moral Hazard (2)

Answer 24

• increased cost for principle
• reduced efficiency

Question 25

what classifies a good as merit or demerit

Answer 25

value judgements

Question 26

How market bubble arise? (7 “steps”)

Answer 26

When speculators expect that the price of the stock of the company will rises over time
↳ They buys the stock of the company.
↳ Demand and price for a stock rises.
↳ When price of the stock rises, it creates incentive to buy more to get capital gain.
↳ One day when the company cannot make profit as much as people expected.
↳ People sell off a lot of the stock.
↳ Price of stock fall dramatically.
↳ “Bubble burst”

Question 27

how are monopolies and oligopolies market failure

Answer 27

because they distort the ideal functioning of a perfectly competitive market, leading to inefficiencies that harm consumers and society as a whole.

Question 28

how can factor immobility cause market failure

Answer 28

If factors are immobile, then markets will find it difficult to clear when there is a change in supply and demand