Definitions

Question 1

Government failure

Answer 1

Occurs when intervention leads to a misallocation of resources or a reduction in economic welfare

Question 2

Regulation

Answer 2

Where government intervenes through legislation

Question 3

Subsidy

Answer 3

A payment usually from the government to producers, or in some cases consumers, of goods and services

Question 4

Taxation

Answer 4

Compulsory charges by governments on individuals and firms

Question 5

Indirect tax

Answer 5

Tax levied on expenditure on goods and services

Question 6

Direct tax

Answer 6

Tax places on income of the people and firms that cannot be avoided

Question 7

Public good

Answer 7

A good that is collectively consumes and has the characteristics of non-excludability and non-rivalry

Question 8

Non-excludability

Answer 8

Situation existing where individual consumers can’t be excluded from consumption

Question 9

Non-rivalry

Answer 9

Where consumption by one person doesn’t affect the consumption of all others

Question 10

Free rider

Answer 10

Someone who directly benefits from consumption of a public food but doesn’t contribute towards its provision

Question 11

Quasi-public good

Answer 11

A good having some but not all of the characteristics of a public good (non-excludable but not non-rivalrous)

Question 12

Private good

Answer 12

A good that is individually consumed and has the characteristics of excludability and rivalry

Question 13

Information failure

Answer 13

A lack of information resulting in consumers and producers making decisions that do not maximise welfare

Question 14

Asymmetric information

Answer 14

Information is not equally shared between two parties. A situation where some participants have better information about market conditions than others

Question 15

Moral hazard

Answer 15

A situation in which a person who has taken out insurance is prone to taking more risk

Question 16

Merit good

Answer 16

A good that brings unanticipated benefits to consumers such that society believes it will be under consumed in a free market (PB>SB)

Question 17

Demerit good

Answer 17

A good where it’s consumption is more harmful than consumers may realise such that it will be over consumed in a free market (PB

Question 18

Externality

Answer 18

A cost or benefit that is external to a market transaction and is thus not reflected in market prices. Spill over effect where a third party is affected by the actions

Question 19

Private cost

Answer 19

Cost of an activity incurred to an individual economic unit (consumer or firm) directly involved in a transaction/taking the particular action

Question 20

Private benefit

Answer 20

Benefit of an activity to an individual economic unit (consumer or firm) directly involved in a transaction/taking the particular action

Question 21

External cost

Answer 21

Cost of an activity faced by third parties as a consequence of externalities

Question 22

External benefit

Answer 22

Benefit of an activity faced by third parties as a consequence of externalities

Question 23

Social cost

Answer 23

Total cost of a particular action (PC+EC)

Question 24

Social benefit

Answer 24

Total benefits of a particular action (PB+EB)

Question 25

Market failure

Answer 25

When a free market fails to allocate resources in the most efficient way

Question 26

Inefficiency

Answer 26

Where economic efficiency is not achieved

Question 27

Resource allocation

Answer 27

How scarce resources are chosen to produce particular goods and services