MARKET FAILURE

Question 1

what is market failure

Answer 1

when resources are misallocated within a free market

Question 2

why can market failure happen

Answer 2

• externalities
• the under-provision of public goods
• information gaps

Question 3

what are public goods

Answer 3

a good where the consumption by one individual, does not effect another individuals consumption whether they like it or not

Question 4

what are private goods

Answer 4

a good where consumption by one individual may result in the good not being available to another individual

Question 5

what is a non rivalrous good

Answer 5

a good that consumers don’t have to compete to access

Question 6

what is a non-excludable good

Answer 6

a good that once supplied to one individual, no-one can be excluded from its consumption

Question 7

what is the free rider problem

Answer 7

when an individual or organisation receive the benefits of public goods that others have paid for without making any contributions themselves

Question 8

what is needed for information gaps

Answer 8

imperfect or asymmetric information

Question 9

what is imperfect information

Answer 9

where buyers or sellers both lack information to make an informed decision

Question 10

what is Asymmetric information

Answer 10

where buyers and sellers have differing amounts of information, with one group having more than another (e.g mechanics)

Question 11

what is an externality

Answer 11

A form of market failure. It results in third party effects that aren’t taken into account by the market mechanism

Question 12

what is private cost

Answer 12

is the cost of an activity to an individual economic agent, such as a consumer or a firm

Question 13

what is social cost

Answer 13

is the cost of an activity not just to the individual economic unit which creates the cost, but to the rest of society as well

Question 14

what is an external cost

Answer 14

negative third party effects and represent costs outside of the market mechanism

Question 15

what is a private benefit

Answer 15

the benefit of an activity to an individual economic agent, such as a consumer or a firm

Question 16

what is social benefit

Answer 16

the benefit of an activity not just the individual economic agent which creates the cost, but to the rest of society as well

Question 17

what are external benefits

Answer 17

are positive third party effects which represent benefits outside the market mechanism

Question 18

what are social costs the addition of

Answer 18

private+external

Question 19

how does the government intervene in market failure

Answer 19

• through ad valorem tax
• through a unit tax

Question 20

how do government correct positive externalities

Answer 20

• subsidies
  -minimum and maximum prices
  -direct provision

Question 21

what are Tradable pollution permits

Answer 21

can help enforce polluters to internalise their externality by introducing an extra cost linked to the level of pollution they can create

• the government sells the permits
• permits are traded between firms
• the high polluters need to spend
  more on permits
• low polluters sell permits receiving
  revenue

Question 22

Advantages to pollution permits

Answer 22

• governments make revenue
• firms have incentives to invest in
  cleaner technology
• carbon emissions reduced
• internalises the external cost
• less polluting firms have greater
  revenues to invest in improving the
  environment

Question 23

disadvantages to pollution permits

Answer 23

• if there are too many permits then
  there will no incentive to reduce
  emissions
• Increased production costs
  ->reduced competitiveness
• higher consumer prices
• does this work on a global scale?
• government costs to monitor the schemes

Question 24

what are merit goods

Answer 24

goods that are under-provided by the market mechanism

Question 25

what are demerit goods

Answer 25

goods that are over-provided by the market mechanism