micro theme 1 1.3

Question 1

what is market failure

Answer 1

market failure occurs whenever markets fail to deliver an efficient allocation of resources and the result is a loss of welfare
exists when the competitive outcome of markets is not satisfactory from the point of view of society

Question 2

what are the causes of market failure (7)

Answer 2

1. knowledge is not perfect- ignorance
2. goods are differenciated
3. resources immobility
4. market power is abused
5. services/goods would or could not be provided in sufficient quantity by the market- merit/demerit goods
6. existence of external costs and benefits- externalities
7. inequality exists

Question 3

what is imperfect knowledge and how impact market failure (5)

Answer 3

• consumers do not have adequate technical knowledge
• advertising can mislead or misinform
• producers are unaware of all opportunities
• producers cannot accurately measure productivity
• decisions are often based on past experiences rather than future knowledge

Question 4

what is differentiated goods + services how affect market failure (4)

Answer 4

• through branding
• designer labels- cost more but is it better quality
• technology- lack of understanding the impact
• labelling and product information

Question 5

how does resource immobility lead to market failure (3) and what is it

Answer 5

where factors of production are not fully mobile
* labour immobility, geographical and occupational
* capital immobility
* land, cannot be moved to where it might be needed eg london

Question 6

how does market power lead to market failure (6)

Answer 6

• existence of monopolies and oligopolies
• collusion (work together)
• price fixing
• abnormal profits
• rigging of markets
• barrier to entry to markets.

Question 7

what are externalities

Answer 7

the activities of firms and consumers affect other people outside of a transaction
refers to the uintended side effects or consequences of an economic activity or transaction

Question 8

what are the main types of externalities (5)

Answer 8

• negative externalities in production
• negative externalities in consumption
• positive externalities in production
• positive externalities in consumption
• mixed externalities

Question 9

what are the types of externality (4)

Answer 9

private cost
private benefit
external cost
external benefit

Question 10

what is a private cost

Answer 10

are the internal costs faced by the producer or consumer directly involved in a transaction

Question 11

what is an external cost

Answer 11

occur when the activity of one agent has a negative effect on the wellbeing of a third party. They impose costs on other agents. this causes social costs which > than private costs

Question 12

what is a private benefit

Answer 12

is the benefit, satisfaction or utility than an individual agent such as a consumer or a business derives from producing or consuming something

Question 13

what is an external benefit

Answer 13

social benefit include private benefits but also add in the external benefits that might occur from production and/ or consumption

Question 14

what is marginal private cost

Answer 14

MPC is the internal cost to a producer or consumer from supplying or consuming one extra unit of a good or service.

Question 15

what is marginal private benefit

Answer 15

MPB is the extra benefit, satisfactionor utility gained by a consumer or producer through consuming or producing one extra unit of a good or service

Question 16

what is marginal external cost

Answer 16

is the cost to third parties from the production/ consumption of an extra unit of output

Question 17

what is marginal social cost

Answer 17

total cost to society arising from producing/ consuming an extra unit of output

Question 18

what is the equation for social cost
social benefit
marginal social benefit

Answer 18

SC= private cost+ external cost
SB= private benefit+ external benefit
MSB= marginal private benefit+ marginal external benefit

Question 19

what is a mixed externality

Answer 19

‘partially internalised externalities’
occur when production and/or consumption leads to both external costs and external benefits simultaneously
the socially optimum level of output will depend on the extent and value of these negative and positive externalities
policy makers need to consider both effects and find ways to encourage positive and mitigate negative.

Question 20

what is a merit good-

Answer 20

goods and services that could be provided by the market but consumers may not be able to afford or feel the need tol purchase them.
consumers are unaware of the full benefits of consumption
market would not provide them in the quantity society needs eg electric car.

Question 21

what’s a demerit good

Answer 21

goods which society over-produce
consumers are aware of the full cost of consumption
goods and services provided by the market which are not in our best interest

Question 22

What is a public goods

Answer 22

Are non-rival (consumption by one person does not reduce the supply available for others) and non-excludable, usually provided collectively by the state

Question 23

What is non-excludability

Answer 23

*meaning that the benefits derived from them cannot be confirmed solely to those who have paid for it
* non-payers can enjoy the benefits of consumption at no financial cost to themselves
*this leads to the free-rider problem ( which results in market failure)

Question 24

What is the free rider problem

Answer 24

-where individuals or organisations can enjoy the benefits from a resource, service, or public good without bearing any cost

Question 25

How does the free rider problem result in market failure (3)

Answer 25

* lack of profit incentive- private companies have little motivation to produce public goods * underproduction or no production- since producers can’t exclude non-payers, they may not produce food at all, even if society values it highly *Discourage people from contributing voluntarily, which can cause essential goods or service to be underfunded or degraded

Question 26

What is inefficient allocation

Answer 26

The market fails to match supply with demand Even if people want the good and would benefit from it, it won’t be provided unless the government or a third party intervenes

Question 27

What is a 2 types of private good

Answer 27

Excludable Rival in consumption

Question 28

What is excludable good

Answer 28

Private goods are highly excludable. Sellers can easily prevent individuals who have not paid from consuming it. It allows for the enforcement of property rights and collection of payment

Question 29

What is a rival in consumption

Answer 29

When one person consumes or uses a private good, it reduces the quantity available for others to consume (there is competition or rivalry among consumers for the same resource)

Question 30

What is pricing and profit

Answer 30

Private goods are typically priced in markets based on supply and demand, and consumers pay for what they consume

Question 31

Why are public goods financed by the government (3)

Answer 31

*non-excludability- taxation ensures that everyone contributes to the funding of public goods, preventing free-riding and ensuring that the costs are distributed across the entire population * economies of scale- producing public goods for a larger population can lead to lower per capita costs. Can be more cost-effective * public interest and equity- taxation allows governments to allocate resources based on societal priorities and ensure that public goods are provided in a way that promotes social welfare and equity