Key Terms 8 - The Market Mechanism, Market Failure and Government Intervention in Markets

Question 1

Market Failure

Answer 1

When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity.

Question 2

Complete Market Failure

Answer 2

A market fails to function at all and a ‘missing market’ results.

Question 3

Partial Market Failure

Answer 3

A market does function, but it delivers the ‘wrong’ quantity of a good or service, which results in resource misallocation.

Question 4

Private Good

Answer 4

A good, such as an orange, that is excludable and rival.

Question 5

Public Good

Answer 5

A good, such as a radio programme, that is non-excludable and non-rival.

Question 6

Quasi-Public Good

Answer 6

A good which is not fully non-rival and/or where it is possible to exclude people from consuming the product.

Question 7

Property Right

Answer 7

The exclusive authority to determine how a resource is used.

Question 8

Externality

Answer 8

A public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is ‘dumped’ on third parties outside the market.

Question 9

Positive Externality

Answer 9

Which is the same as an external benefit, occurs when the consumption or production of a good causes a benefit to a third party, where the social benefit is greater than the private benefit.

Question 10

Negative Externality

Answer 10

Which is the same as an external cost, occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost.

Question 11

Production Externality

Answer 11

An externality (which may be positive or negative) generated in the course of producing a good or service.

Question 12

Consumption Externality

Answer 12

An externality (which may be positive or negatice) generated in the course of consuming a good or service.

Question 13

Merit Good

Answer 13

A good, such as healthcare, for which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good.

Question 14

Subsidy

Answer 14

A payment made by the government or other authority, usually to producers, for each unit of the subsidised good that they produce. Consumers can also be subsidised.

Question 15

Demerit Goods

Answer 15

A good, such as tobacco, for which the social costs of consumption exceed the private costs. Value judgements are involved in deciding that a good is a demerit good.

Question 16

Social Cost

Answer 16

The total cost of an activity, including the external cost as well as the private cost.

Question 17

Information Problem

Answer 17

Occurs when people make wrong decisions because they don’t possess or they ignore relevant information. Very often they are myopic (short-sighted) about the future.

Question 18

Immobility of Labour

Answer 18

The inability of labour to move from one job to another, either for occupational reasons (e.g. the need for training) or for geographical reasons (e.g. the cost of moving to another part of the country).

Question 19

Government Failure

Answer 19

Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome.