Market failure, Externalities, Public Goods- MM

Question 1

What is market failure?

Answer 1

Market failure exists when the competitive outcome produced by the operation of the free market is not the best outcome for society

Question 2

When does an externalitiy occur?

Answer 2

When the production or consumption of a good or service causes an impact for an unrelated third party

Question 3

What is a negative externality of production?

Answer 3

When the process of producing a good or service creates a negative consequence for individuals or groups outside the business e.g. pollution

Question 4

What is a negative externality of consumption?

Answer 4

When the process of consuming a good or service creates a negative consequence for individuals or groups not consuming it e.g. second-hand smoking

Question 5

What is a positive externality of production?

Answer 5

When the process of producing a good or service creates a positive consequence for individuals or groups outside the business e.g. a business builds an attractive tourist attrction

Question 6

What is a positive externality of consumption?

Answer 6

When the action of consuming a good or service creates a positive consequence for individuals or groups not consuming it e.g. individuals cycling & not driving reduces traffic congestion

Question 7

How do you get social costs?

Answer 7

Private costs + External costs

Question 8

What is a private cost?

Answer 8

Something affecting the individual only

Question 9

What is an external cost?

Answer 9

Something affecting others

Question 10

What are the 1) demand & 2) supply curve also known as?

Answer 10

1) MPB
2) MPC

Question 11

What is it called when MPB=MPC?

Answer 11

Free market allocative efficiency

Question 12

When is it allocative efficiency?

Answer 12

When MSB=MSC

Question 13

What could the P axis also be labelled as?

Answer 13

Costs & benefits

Question 14

If there is a positive externality in production, what happens on the diagram?

Answer 14

The D/MPB curve = MSB
The S/MPC curve shifts right, with this curve being MSC

Question 15

If there is a negative externality of production, what happens on the diagram?

Answer 15

The D/MPB curve = MSB
The S/MPC curve shifts left, with this curve being the MSC

Question 16

If there is a positive externality of consumption, what happens on the diagram?

Answer 16

The S/MPC = MSC
The D/MPB curve shifts right, with this curve being the MSB

Question 17

If there is a negative externality of consumption, what happens on the diagram?

Answer 17

The S/MPC = MSC
The D/MPB curve shifts left , with this curve being the MSB

Question 18

Where do you find welfare loss after an externality in production?

Answer 18

Find the vertical distance between the MPC & MSC and shade the triangle

Question 19

Where do you find welfare loss after an externality in consumption?

Answer 19

Find the vertical distance between the MPB & MSB and shade the triangle

Question 20

If the externality is 1) Positive & 2) Negative which way does the triangle point?

Answer 20

1) Right
2) Left

Question 21

What is marginal social cost (MSC)?

Answer 21

The additional cost of producing one extra unit of a good

Question 22

What is marginal social benefit?

Answer 22

The additional benefit that society gains from consuming an extra unit of a good

Question 23

What is information failure?

Answer 23

A type of market failure where individuals or firms have a lack of information about economic decisions

Question 24

When does information failure occur?

Answer 24

When economic agents make incorrect decisions due to a lack of appropriate information- causing a welfare loss to society

Question 25

What are the 4 types of information failure?

Answer 25

1) Asymmetric information failure 2) Moral hazard 3) Merit goods 4) Demerit goods

Question 26

What is asymmetric information failure?

Answer 26

When one party has access to information the other party doesn't (one sided info)

Question 27

What is moral hazard?

Answer 27

Where one party engages in risky behaviour or fails to act in good faith because it knows the other party will bear the economic consequences of the behaviour

Question 28

What are merit goods?

Answer 28

Goods (mainly services) that will be under-consumed by the public as they don't fully appreciate their benefit

Question 29

What does a merit good cause on a diagram?

Answer 29

D/MPB shifts right to MSB

Question 30

What are demerit goods?

Answer 30

Opposite to merit goods- goods over-consumed by the public as they fail to recognise the dangers that they can cause

Question 31

What does a demerit good cause on a diagram?

Answer 31

MSB curve lies underneath the D/MPB curve (shift left)

Question 32

Which way does the welfare loss triangle point on a 1) Merit diagram and 2) Demerit diagram?

Answer 32

1) Right 2) Left

Question 33

When do missing markets occur?

Answer 33

When there is a big demand for a good or service but no free market wants to provide

Question 34

When do incomplete markets occur?

Answer 34

When there is a big demand for a particular good or service but not enough private sector businesses are interested in meeting this demand

Question 35

What is a private good?

Answer 35

A good that when consumed, no one else can consume that particular good (e.g. our curry)- they have a large profit incentive

Question 36

What are public goods?

Answer 36

Commodities or services provided without profit to all members of a society, usually by the government- no profit incentive

Question 37

What are 4 characteristics of a pure-public good?

Answer 37

1) Non-rivalry 2) Non-excludability 3) Zero marginal cost of production 4) Non-rejectability

Question 38

What is non-rivalry?

Answer 38

When consumption of a good by 1 individual doesn't reduce the amount available for consumption by another e.g. street lights, radio station

Question 39

What is non-exludability?

Answer 39

When consumption of a good by 1 person makes it impossible to exclude any other individual from having the opportunity to consume e.g. public road, street lighting

Question 40

What is zero marginal cost of production?

Answer 40

Once a public good is provided the cost of providing another is zero e.g. UK armed forces defend the country- one more family adds 0 cost

Question 41

What is non-rejectability?

Answer 41

Once a public good has been provided, the beneficiaries of that good cannot avoid consuming it e.g. if in England, you cannot choose to be defended by the US instead

Question 42

What is a quasi-public good?

Answer 42

A good that has only some of the traits of a public good e.g. public roads

Question 43

How do public goods cause market failure?

Answer 43

The existence of free riders

Question 44

What is a free rider?

Answer 44

A consumer or business that benefits from a good or service but does not pay for it

Question 45

Can merit goods always be provided privately?

Answer 45

Yes

Question 46

What are 4 possible evaluation points for the consumption of merit goods?

Answer 46

1) Duration 2) Gvnmt failure (politicians) 3) Size 4) Unforeseen circumstances

Question 47

What are 4 possible evaluation points for the consumption of demerit goods and its impact on society? (do= depends on)

Answer 47

1) Elasticity of demand 2) do size of consumption 3) do overseas relativity 4) do government failure

Question 48

What are 2 possible evaluation points for the production of merit goods?

Answer 48

1) Type (importance) 2) Economic position

Question 49

What are 4 key roles for the state in a mixed economy?

Answer 49

1) Merit goods 2) Public goods 3) Welfare services 4) Regulation

Question 50

What are quasi-public goods?

Answer 50

Semi non-rival or semi non-excludable (roads- can be banned from driving)

Question 51

What impact does technology have on public goods?

Answer 51

Making them more excludable

Question 52

What are 2 reasons public goods are important?

Answer 52

1) Investment into PG helps long term economic growth & development 2) Technology needs public goods e.g. cars need roads

Question 53

What are 4 reasons that all sectors of the economy need public goods?

Answer 53

1) Corporate laws 2) Environmental laws 3) Trust in banking systems 4) Power & water treatment laws

Question 54

What are 5 reasons that government spending on public goods should increase?

Answer 54

1) Economies of scale- more efficient 2) Access & affordability- No profit incentive=affordable- important for equity 3) State provision needed for missing markets 4) Drive long-run economic growth 5) Lead to higher private sector investment

Question 55

What are 4 reasons that government spending on public goods shouldn't increase?

Answer 55

1) Absence of profit incentive leads to X-inefficiency & diseconomies of scale (higher costs) 2) Weaker institutions= corruption or wasteful spending (gvnmt failure) 3) More effcient for gvnmt to fund but the private sector to provide 4) Market incentives may promote innovation in the long run