lesson 15

Question 1

what is an externality?

Answer 1

knock on effects on third parties

Question 2

price as a signal

Answer 2

it allows buyers and sellers to plan and coordinate

Question 3

price as an incentive

Answer 3

higher prices incentivise suppliers to supply more

higher prices lead to higher profit

Question 4

price and rationing

Answer 4

prices will rise to eliminate excess demand and fall to eliminate excess supply

Question 5

price and resource allocation

Answer 5

resources are directed towards markets where there is excess demand

higher demand leads to higher prices leading to an increase in supply

Question 6

what is market failure?

Answer 6

when firms fail to produce the products that people want in the quantities they desire and at the price that reflects consumers satisfaction

Question 7

when does market failure occur?

Answer 7

whenever the market mechanism performs badly or fails to perform at all.

Question 8

what is complete/ total market failure?

Answer 8

when the market is missing/ does not exist at all

Question 9

what is partial market failure?

Answer 9

the market is producing the wrong quantity of goods or service

Question 10

what do we get when the price mechanism breaks down?

Answer 10

market failure

Question 11

5 examples of market failure

Answer 11

1. when the true costs of a firms activities are not reflected in the price
2. when the free market does not supply goods and services that people want so we lack allocative efficiency
3. when poor people cant afford the medicines that they need
4. when the rich have a lot more than the poor. inequality
5. when firms have too much power and become inefficient and change customers high prices

Question 12

what is public choice theory?

Answer 12

most economists agree that competitive free markets offer the best allocation of resources

Question 13

what does the profit incentive do?

Answer 13

it pushes for firms to devote scarce resources to where demand is the greatest

Question 14

partial market failure: examples of under producing

Answer 14

electric cars
healthy food
solar panels

Question 15

partial market failure: examples of over producing

Answer 15

petrol
alcohol
cigarettes

Question 16

ways governments can intervene include…

Answer 16

laws
subsidies
provision
information
taxes

Question 17

if the market is failing many people think who should intervene? (public interest theory)

Answer 17

the government

Question 18

what is government failure?

Answer 18

when the government get things wrong and make matters worse

Question 19

solution for market failure: negative externalities

Answer 19

indirect tax, educate, bans

Question 20

solution for market failure: unfilled job vacancies

Answer 20

increasing training, immigration

Question 21

solution for market failure: output inside the PPC

Answer 21

cut benefits, subsidise manufacturers

Question 22

solution for market failure: food mountains (excess supply)

Answer 22

export it

Question 23

solution for market failure: shortages of electricity (excess demand)

Answer 23

subsidise power plants

Question 24

solution for market failure: positive externalities

Answer 24

campaigns, encourage consumption