Chp 5a Basics of Market Failure

Question 1

What is the efficient allocation of resources?

Answer 1

Adequate available resources are used in the production of goods or services to bring about maximum total economic surplus, where social welfare is maximised.

Question 2

Define Marginal Private Cost and Benefit.

Answer 2

MPC is the change in total private cost as a result of undertaking an additional unit of an economic activity. The MPC curve is UPWARD sloping.
MPB is the change in total private benefit as a result of undertaking an additional unit of an economic activity. MPB curve is DOWNWARD sloping.

Question 3

Define marginal social cost and benefit.

Answer 3

MSC is the change in total social cost as a result of undertaking an additional unit of an economic activity.
MSB is the change in total social benefit as a result of undertaking an additional unit of an economic activity.

Question 4

Define marginal external cost and benefit.

Answer 4

MEC is the change in total external cost as a result of undertaking an additional unit of an economic activity.
MEB is the change in total external benefit as a result of undertaking an additional unit of an economic activity.