deck 2

Question 1

Merit goods

Answer 1

a good with positive externalities, which if left to the free market would be under-produced and/or under-consumed

Question 2

Demerit goods

Answer 2

a good with negative externalities, which if left to the free market would be over produced and/or over-consumed

Question 3

Externalities

Answer 3

spill-over effects that directly affect a 3rd party

Question 4

Marginal social Cost

Answer 4

Marginal private cost + any external cost or benefit of production

Question 5

Marginal private cost

Answer 5

private supply curve based on firm’s costs of production

Question 6

Marginal social benefit

Answer 6

Marginal private benefit + any external cost or benefit of consumption

Question 7

Marginal private benefit

Answer 7

supply curve of the utility or benefit to consumers

Question 8

Public goods

Answer 8

non-rivalrous non-excludable

Question 9

free rider

Answer 9

because public goods are non-excludable and non-rivalrous, this leads to the free rider problem

Question 10

Quasi public goods

Answer 10

a near public good

Question 11

Market failure

Answer 11

when the free market fails to deliver the socially optional outcome

Question 12

PED

Answer 12

%changeQd/ %change P

Question 13

PES

Answer 13

%changeQs/ %changeP

Question 14

XED

Answer 14

%changeQd a/ %changeP b

Question 15

YED

Answer 15

% change Qd / % change income

Question 16

Equilibrium

Answer 16

where Qs=Qd

Question 17

Price mechanism

Answer 17

allocates resources when there is a change in price

Question 18

Determinants of PED

Answer 18

Substitutes Habit forming Income Time

Question 19

Determinants of PES

Answer 19

economics of scale time mobility of FOPs unused capacity ability to store stocks

Question 20

Sustainability

Answer 20

where the needs of the present generation are met without reducing the ability of later generations to meet their consumption needs

Question 21

Cap and trade systems

Answer 21

national targets to reduce emissions by creating an economic incentive. Because not confined to borders, international cooperation needed

Question 22

Solutions to negative externalities

Answer 22

Indirect taxation Banning/ regulation Negative advertising Minimum pricing

Question 23

pros and cons of indirect taxation

Answer 23

Pros:

• government revenue through taxation(neg ads)
• reduction in consumption

Cons:

• difficult to get optimum level of taxation
• may not reduce quantity consumed (PED is low) –burden passed on?
• affects those of lower income disproportionally
• parallel market
• unemployment in an industry
• less competitive

Question 24

pros and cons of negative advertising

Answer 24

Pros:

• could be effective

Cons:

• expense (opportunity cost)
• effectiveness
• longevity

Question 25

pros and cons of minimum pricing

Answer 25

pros: * reduced demand possible cons: * larger effect on poor (crime), not necessarily responsible;

Question 26

pros and cons of regulation

Answer 26

pros: * reduced demand cons: * cost of enforcement and evasion * parallel markets (crime) * increased business costs and prices outsourcing

Question 27

intervention for positive externalities

Answer 27

* subsidies * state provision (health care) * regulation (mandatory education) * positive advertising

Question 28

evaluation of subsidies against market failure

Answer 28

* cost, public financing * opportunity cost does it get to consumer in reduced prices? -**PED**

Question 29

evaluation of state provision

Answer 29

* cost opportunity * cost efficiency (eg soviet union food provisions) * political interference

Question 30

evaluation of regulation

Answer 30

* cost of enforcement * avoidance

Question 31

evaluation of positive advertising

Answer 31

* costs of ads * effectiveness (cigarette smoking kills vs pictures)

Question 32

provision of public goods

Answer 32

state provision private sector operation (prison)

Question 33

evaluation of private sector operation

Answer 33

more efficient cost of setting up the provision profit ahead of welfare

Question 34

reasons for a subsidy (not market failure)

Answer 34

* lower price of essential goods * guarantee supply of products gov deems necessary for economy/ industry creates a lot of employment * enable producers to compete internationally

Question 35

subsidy

Answer 35

an amount of money paid by the government to the firm per unit output can be percentage/ fixed value (fixed most often)

Question 36

analysis of subsidy

Answer 36

* opp cost for government * causing firm inefficiency (if not competing int.) * who is paying for the subsidy, tax payers? * damage to sales of foreign producers

Question 37

Effects of a shortage

Answer 37

Black market Queues at shops To fix shortage, shift demand/supply. (Demand shift counters max price) Shifting supply ( subsidise prod; state provided; release of stored stocks)

Question 38

indirect tax

Answer 38

placed on expenditure, raising the costs of production specific vs percentage tax

Question 39

effects of indirect tax

Answer 39

stakeholders: * producers * may pass on costs * if not reduced rev * depends on **PED** * may reduce eployment * gov - tax revenue, * consumer - burden may be passed on

Question 40

price control

Answer 40

max price min price

Question 41

max price control effects

Answer 41

excess demand (shortage) * black market if not shifted * queues at shops, therefore chose customers to shift supply to fulfill shortage: * subsidies * produce themselves * release stocks

Question 42

minimum price control effects

Answer 42

excess supply * gov must buy up excess or min will be **avoided** * then store/ destroy/ sell to poor countries

Question 43

reasons for max price control

Answer 43

protect consumers (implemented when good merit)

Question 44

reasons for min price control

Answer 44

attempt to raise income of producers protect workers with minimum wage