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Market Failure Flashcards

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1
Q

What does market failure refer to?

A

The failure of the market to allocate resources efficiently.

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2
Q

What is the distinction between a competitive market and an imperfect market?

A

Competitive markets allocate resources efficiently, while imperfect markets do not.

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3
Q

What can result from underproduction and overproduction in a market?

A

A deadweight loss.

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4
Q

What are positive externalities?

A

Benefits experienced by third parties not involved in a transaction.

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5
Q

What are negative externalities?

A

Costs imposed on third parties not involved in a transaction.

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6
Q

How do externalities influence market efficiency?

A

They can result in a deadweight loss.

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7
Q

What is market power?

A

The ability of a firm to influence the price of a good or service.

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8
Q

What are barriers to entry?

A

Obstacles that prevent new competitors from easily entering an industry.

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9
Q

What is allocative inefficiency?

A

When too much or too little of goods or services are produced and consumed from a social perspective.

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10
Q

What is an externality?

A

A side effect of an economic transaction that affects third parties.

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11
Q

What are third parties in the context of externalities?

A

Individuals not involved in the economic transaction but affected by the externality.

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12
Q

What is a positive externality also known as?

A

External benefit.

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13
Q

What is a negative externality also known as?

A

External cost.

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14
Q

What are consumption externalities?

A

Externalities that arise from consumer activities.

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15
Q

What are production externalities?

A

Externalities that arise from production activities.

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16
Q

What is a negative production externality?

A

External costs created by producers.

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17
Q

What example illustrates a negative production externality?

A

A cement factory emitting smoke and dumping waste.

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18
Q

What does the supply curve reflect in the context of externalities?

A

The firm’s private costs of production.

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19
Q

What does the marginal social cost curve represent?

A

The full cost to society of producing a good.

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20
Q

What is the social optimum in production?

A

The output level where marginal social benefit equals marginal social cost.

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21
Q

What is welfare loss?

A

The reduction in social benefits due to misallocation of resources.

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22
Q

How is welfare loss calculated?

A

The difference between marginal social cost and marginal social benefit for overproduced output.

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23
Q

What is allocative efficiency?

A

Achieved when marginal social benefit equals marginal social cost.

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24
Q

What happens when there is a negative consumption externality?

A

The free market overallocates resources to the good.

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25
What is the effect of negative externalities on society?
They cause external costs that lead to allocative inefficiency.
26
What do we call the additional cost incurred by third parties due to negative externalities?
Marginal external cost (MEC).
27
In the context of negative consumption externalities, what happens to the demand curve?
The marginal social benefit curve lies below the marginal private benefit curve.
28
What is the impact of positive externalities on resource allocation?
They lead to underallocation of resources to the production of a good.
29
What does the marginal social cost curve represent in positive production externalities?
It lies below the marginal private cost curve.
30
What welfare loss occurs due to positive production externalities?
The difference between marginal social benefit and marginal social cost for underproduced output.
31
What is the socially optimal output?
The quantity where marginal social benefit equals marginal social cost.
32
What is the role of research and development in positive externalities?
It creates external benefits for society as new technologies spread.
33
What is welfare loss?
It involves external benefits for society that are lost because not enough of the good is produced. ## Footnote If the externality were corrected, society would gain the benefits represented by the shaded area.
34
Where does the point of the welfare loss triangle lie?
At the $Q_{opt}$ quantity of output.
35
From the producer perspective, what is the relationship between marginal private benefit and marginal private cost?
Marginal private benefit ($MPB$) = marginal private cost ($MPC$).
36
What represents the additional benefit enjoyed by third parties not involved in the production and consumption of a good?
Marginal external benefit ($MEB$).
37
What is the formula for marginal social benefit?
Marginal social benefit ($MSB$) = marginal private benefit ($MPB$) + marginal external benefit ($MEB$).
38
What is allocative efficiency?
Achieved at the socially optimal output.
39
At the socially optimal output, what is the relationship between marginal social benefit and marginal social cost?
Marginal social benefit ($MSB$) = marginal social cost ($MSC$).
40
What occurs when there is a positive production externality?
The free market underallocates resources to the production of the good.
41
What are some external benefits arising from the consumption of education?
* More productive workforce * Lower unemployment * Higher rate of growth * More economic development * Lower crime rate
42
How does the marginal social benefit curve relate to the marginal private benefit curve in the presence of positive consumption externalities?
The marginal social benefit ($MSB$) curve lies above the marginal private benefit ($MPB$) curve.
43
What indicates that the market underallocates resources to education?
Since $Q_{opt} > Q_m$.
44
What is the effect of positive externalities on resource allocation?
They lead to an underallocation of resources to the good.
45
What happens when there are external costs?
Marginal social cost ($MSC$) > marginal social benefit ($MSB$).
46
What is the relationship between marginal social benefit and marginal social cost when there are external benefits?
Marginal social benefit ($MSB$) > marginal social cost ($MSC$).
47
What creates a divergence between private and social costs in production externalities?
Marginal private cost ($MPC$) and marginal social cost ($MSC$).
48
What creates a divergence between private and social benefits in consumption externalities?
Marginal private benefit ($MPB$) and marginal social benefit ($MSB$).
49
What is market power?
The ability of a business to insulate itself from competition.
50
What is the impact of market power on price and output?
It leads to reduced output, higher prices, and loss of economic welfare.
51
What characterizes a competitive market?
Many buyers and sellers acting independently.
52
What happens as competition increases between sellers?
Market power decreases.
53
What defines an imperfect market?
Exists when there are relatively small number of firms or when firms have market power.
54
What are the two main types of imperfect competition?
* Monopoly * Oligopoly
55
What is a monopoly?
A market with just one firm.
56
What is the consequence of monopoly power?
Leads to a welfare loss and allocative inefficiency.
57
What are barriers to entry?
Anything that restricts or blocks the entry of new firms into an industry or market.
58
What are some examples of barriers to entry?
* Government regulation * Patents * Technology barriers * Startup costs * Licensing requirements
59
What does controlling a scarce resource represent in terms of market power?
Gives sole rights to mine the gems.
60
What is the economic effect of a monopolist reducing output?
Increases price and reduces consumer surplus.
61
What happens to total surplus when a monopolist restricts the market?
Total surplus decreases by the area of deadweight loss ($DWL$).
62
What do most countries have in place to address market power?
Government legislation promoting a competitive business environment.

Economics (1 decks)

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