Market Failure

Question 1

What is the economic problem?

Answer 1

How do we satisfy unlimited needs and wants with finite resources

Question 2

Markets operate based on…

Answer 2

Markets operate based on the principle of maximisation.

Question 3

What do producers want to maximise?

Answer 3

Profit

Question 4

What do consumers want to maximise?

Answer 4

Utility

Question 5

What do governments want to maximise?

Answer 5

Welfare

Question 6

Market Failure definition

Answer 6

Market outcomes lead to a misallocation of resources

Question 7

What is a misallocation of resources?

Answer 7

Where resources are not used to maximise society’s welfare

Question 8

What are the two types of market failure?

Answer 8

• Complete market failure

• Partial market failure

Question 9

Complete Market Failure definition

Answer 9

There is no market available for a good which society regards as desirable

Question 10

Complete market failure results in…

Answer 10

Complete market failure results in missing markets

Question 11

Partial Market Failure definition

Answer 11

A market is available but the market output and price is not optimal for society’s welfare

Question 12

Partial market failure means…

Answer 12

Partial market failure means too much/little of a good is being produced and consumed.

Question 13

Monopolists seek to…

Answer 13

Monopolists seek to increase prices by restricting output

Question 14

What are private goods two characteristics?

Answer 14

• Excludability

• Rivalry

Question 15

What is excludability?

Answer 15

The owners of a good have property rights which allows them to prevent others consuming their good

Question 16

What is rivalry?

Answer 16

Consumption of a good reduces the mount of the good that others can consume

Question 17

What two characteristics do public goods have?

Answer 17

• Non-excludability

• Non-rivalry

Question 18

What is Non-Excludability?

Answer 18

It is difficult or impossible to prevent others from consuming a good

Question 19

What is Non-Rivalry?

Answer 19

Consumption of a good has little or no effect on the amount left for others to consume

Question 20

Example of a private good?

Answer 20

Pizza

Question 21

Example of a public good?

Answer 21

Lighthouse

Question 22

What affects the provision of public goods?

Answer 22

The market provision of public goods is often prevented by free-riders

Question 23

What are Non-pure public goods?

Answer 23

Non-pure public goods have some but not all of the characteristics of a public good.

e.g Excludable but non-rival

Question 24

What is the solution to the complete market failure caused by public goods?

Answer 24

State Provision

e.g Government pays for army & roads

Question 25

What are internal costs/benefits?

Answer 25

The costs / benefits incurred / gained by the economic agent for producing or consuming a product.

Question 26

Private costs = ?

Answer 26

Private costs = Internal costs

Question 27

Private benefits = ?

Answer 27

Private benefits = Internal benefits

Question 28

Whether consuming or producing a product is good for an agent will depend on what?

Answer 28

Whether consuming or producing a product is good for an agent will depend on whether the private benefits are larger than the private costs.

Question 29

What are external costs/benefits?

Answer 29

The costs / benefits incurred / gained by other economic agents in society for producing or consuming a product.

Question 30

Social costs = ?

Answer 30

Social costs = Internal costs + External costs

Question 31

Social benefits = ?

Answer 31

Social benefits = Internal benefits + External benefits

Question 32

Whether consuming or producing a product for society will depend on what?

Answer 32

Whether consuming or producing a product for society will depend on whether the social benefits are larger than the social costs.

Question 33

Individual decisions are…

Answer 33

Individual decisions are based on private costs and benefits

Question 34

Social welfare is maximised by…

Answer 34

Social welfare is maximised by weighing up social costs and benefits

Question 35

What are externalities?

Answer 35

External costs and benefits affect society but are not considered by the decision maker

Question 36

What is a MERIT GOOD?

Answer 36

A good which is under provided by a market

Question 37

What is a DEMERIT GOOD?

Answer 37

A good which is over provided by a market

Question 38

Why might foods be over or under provided?

Answer 38

• Externalties • Imperfect Information

Question 39

What is value judgment?

Answer 39

A decision on an issue which has to be based on option as there is no correct answer.

Question 40

What is ‘THE MARGIN’?

Answer 40

The margin is a concept which refers to the next unit or item. It considers what would happen if the variable increased or decreased by one unit