definitions/ other micro knowledge

Question 1

Market failure

Answer 1

Market failure occurs whenever a market leads to a misallocation of resources.

Question 2

Government failure

Answer 2

an intervention that results in an inefficient use of scarce resources, often as a result of attempting to correct a market failure.

Question 3

complete market failure analysis

Answer 3

• a public good is non excludable, which means that nobody can be prevented from benefiting from it
• as those who have not paid can still benefit, consumers have an incentive to avoid paying to hope for a ‘free ride’
• this means that firms are unable to generate enough revenue to make the production of the good profitable and the incentive function of prices breaks down
• without a seller of a good there is a missing market and the market fails completely

Question 4

what causes government failure

Answer 4

-unintended consequences

-information failure

• distorted price signals
• high administrative costs
• conflicting objectives

Question 5

regulations that don’t affect costs

Answer 5

-age
-outright ban
-banning advertising
-limits on production