Chapter 8

Question 1

What is a market failure?

Answer 1

A market failure is a situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes
Externalities
Public goods
Imperfect information

Question 2

What is a government failure?

Answer 2

Government failures are when the government intervention actually makes the situation worse

Question 3

What are externalities?

Answer 3

Externalities are the effects of a decision on a third party that are not taken into account by the decision-make

Question 4

What are negative externalities?

Answer 4

Negative externalities occur when the effects are detrimental to others

Question 5

What are positive externalities?

Answer 5

Positive externalities occur when the effects are beneficial to others

Question 6

what is the marginal social cost

Answer 6

The marginal social cost includes the marginal private costs of production plus the cost of negative externalities associated with that production

Question 7

What is direct regulation?

Answer 7

Direct regulation is when the government directly limits the amount of a good people are allowed to use

Question 8

What are tax incentives?

Answer 8

Tax incentives are programs using a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends

Question 9

What are Market incentives?

Answer 9

Market incentives are plans requiring market participants to certify that they have reduced total consumption by a certain amount

Question 10

What is the free rider problem?

Answer 10

Free rider problem is individuals’ unwillingness to share the cost of a public good

Question 11

What is an optimal policy?

Answer 11

An optimal policy is one in which the marginal cost of undertaking the policy equals the marginal benefit of that policy

Question 12

What is a public good?

Answer 12

A public good is nonexclusive and nonrival

There are no pure public goods; national defense is the closest example

Question 13

What is a non-exclusive?

Answer 13

Nonexclusive: no one can be excluded from its benefits

Question 14

What is a nonrival?

Answer 14

Nonrival: consumption by one does not preclude consumption by others

Question 15

What is an adverse selection problem?

Answer 15

An adverse selection problem is a problem that occurs when buyers and sellers have different amounts of information about the good for sale

Question 16

What is a Moral hazard problem?

Answer 16

A moral hazard problem is a problem that arises when people don’t have to bear the negative consequences of their actions

Question 17

What is signaling?

Answer 17

Signaling refers to an action taken by an informed party that reveals information to an uninformed party that offsets the false signal that caused the adverse selection in the first place

Question 18

Reasons for government failures

Answer 18

Government doesn’t have an incentive to correct the problem
Government doesn’t have enough information to deal with the problem
Intervention in markets is almost always more complicated than it initially seems
The bureaucratic nature of government intervention does not allow fine-tuning
Government intervention leads to more government intervention