Market Failure

Question 1

When does market failure occur

Answer 1

Market failure occurs when a market allocates resources inefficiently

Society suffers as a result

Government often tries to intervine to try and stop it

Question 2

Describe complete market failure

Answer 2

No market exists I.e. ‘missing market’

E.g. national defence

No market which allocates national defence therefore gov needs to provide it

Question 3

Describe partial market failure

Answer 3

Market functions but qty supplied of a good or service is wrong

If left to market forces:,
People unable to afford treatment they need -> government may intervine and provide free health care

Question 4

What do externalities affect

Answer 4

Third parties

Question 5

What are externalities

Answer 5

The effects that producing or consuming a good/service who aren’t involved in the making, buying/selling and consumption of good/service

Question 6

What are externalities

Answer 6

The effects that producing or consuming a good/service who aren’t involved in the making, buying/selling and consumption of good/service

Question 7

What are the two types of externalities

Answer 7

Positive or negative externalities

Question 8

What are positive externalities

Answer 8

External benefits to a third party

Question 9

Negative externalities

Answer 9

External costs to a third party

Question 10

Why does market failure occur

Answer 10

Because externalities are being ignored

Question 11

What is a private cost

Answer 11

The cost of doing something to either a consumer or a firm

Question 12

What are external costs

Answer 12

Caused by externalities e.g. dropping litter

Question 13

What are external costs

Answer 13

Caused by externalities e.g. dropping litter

Create an external cost to the council who then have to pay someone to clean it up

Question 14

What is social cost

Answer 14

Full cost to society

Private costs + external costs = social costs

Question 15

What is private benefit

Answer 15

Benefit gained by a consumer or firm by doing something

Question 16

What is external benefit caused by

Answer 16

Caused by externalities

Question 17

What is social benefit

Answer 17

Private benefit + social benefit

Full benefit received by society from pollution

Question 18

What does ignoring negative consumption externalities lead to

Answer 18

It leads to overconsumption

Question 19

What does ignoring positive production externalities lead to

Answer 19

Leads to underproduction

Question 20

What does merit goods do to society

Answer 20

It benefits society

Question 21

What do demerit goods do to society

Answer 21

Do the opposite to demerit goods

Question 22

Merit goods have

Answer 22

Greater social benefits than private benefits

Consumption is beneficial to the individual and society

Question 23

Demerit goods have

Answer 23

Greater social costs than private costs

Consumption is harmful to people and society
However people are usually unaware or don’t care

Question 24

What does the market do to merit and demerit goods

Answer 24

Merit goods are over underprovided

Demerit goods are overprovided

Question 25

What does ignoring negative production externalities lead to

Answer 25

Overproduction

Question 26

What does ignoring positive production externalities lead to

Answer 26

Leads to underproduction

Question 27

Ignoring negative consumption externalities leads to

Answer 27

Overconsumption

Question 28

What does ignoring positive consumption externalities lead to

Answer 28

Underconsumption

Question 29

Government can intervene In markets for merit and demerit goods

Answer 29

.

Question 30

Why does government intervene in a market

Answer 30

Failure of the market to meet socially optimum levels

Question 31

How can the government influence the market

Answer 31

Taxes Subsides -> increase/decrease in consumption

Question 32

What are the two characteristics of a public good

Answer 32

Non excludability - people cannot be stopped from consuming the good even though they haven't paid for it Non rivalry - one person benefitting from the good doesn't stop others

Question 33

Examples of a public good

Answer 33

Firework displays, lighthouses

Question 34

What are private gooda

Answer 34

Excludable People have a choice to consume Most goods are private goods

Question 35

What are non-pure (quasi) public goods

Answer 35

Public good, but not fully E.g. roads

Question 36

Public goods are underprovided in the free market

Answer 36

..

Question 37

What is the free rider problem

Answer 37

Once a public good is provided, it is impossible to stop someone from benefitting from it, even if they haven't paid

Question 38

What cannot work if there are free riders

Answer 38

Price mechanism Because instead people will wait for someone to pay

Question 39

What happens when producers overvalue the benefits of a public good

Answer 39

Price goes up

Question 40

What is it an example of something where no market exists for externalities

Answer 40

Example of missing market

Question 41

Symmetric information

Answer 41

Everyone has equal and perfect knowledge

Question 42

What does a competitive market have

Answer 42

Perfect information

Question 43

What does symmetric information allow

Answer 43

It allows efficient allocation of resources This situation is very rare however buyers don't have time or resources to obtain full info on prices before buying

Question 44

What is asymmetric information

Answer 44

Lack of perfect information in the market Sellers have more info on product than buyers or vice versa Information is imperfect

Question 45

What does information failure cause

Answer 45

Market failure

Question 46

What does imperfect information cause

Answer 46

Market failure Underconsumption of merit goods - consumers may not know the benefit Overconsumption of demerit goods - no info on how bad it is Merit goods may be underprovided and demerit overprovided

Question 47

Consumption by an individual depends on

Answer 47

Wealth and income

Question 48

What is income

Answer 48

Amount of money received over a set period of time

Question 49

What is wealth

Answer 49

Value in money of assets held

Question 50

Money + wealth is not distributed equally in a market economy

Answer 50

..

Question 51

How would government try to distribute income and wealth more equally

Answer 51

Government intervention E.g. progressive taxes

Question 52

What are the disadvantages of government trying to distribute wealth and income more equally

Answer 52

Removes incentive for individuals+firms to work hard -> market failure Immobile factors of production (one that cannot be easily moved to another area of the economy) E.g. Land, capital However capital is mobile and immobile

Question 53

Mobile labour

Answer 53

Able to move from one job to another Occupational or geographical

Question 54

Why would there be geographical immobility

Answer 54

Reluctance to leave family + friends Dislike of change Imperfect information for jobs Large house price, rent, cost of living

Question 55

Why would there be occupational immobility

Answer 55

Lack of training, education and skills Lack of required qualifications Lack of work experience

Question 56

What do monopolies cause

Answer 56

They cause market failure and misallocation of resources

Question 57

What do monopolies cause

Answer 57

Market failure and misallocation of resources

Question 58

Draw a negative production externalities diagram

Answer 58

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Question 59

Draw a positive production externalities diagram

Answer 59

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Question 60

Draw a negative consumption externalities diagram

Answer 60

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Question 61

Draw a positive consumption externalities diagram

Answer 61

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