microeconomics booklet 3

Question 1

when does a market fail?

Answer 1

when there is a misallocation of resources, not allocatively efficient

Question 2

what are the three functions of price?

Answer 2

signaling function-to give information to traders to enable them to plan their economic activity
incentive function- based on the signals economic agents alter their behavior
allocative function- to decide how resources are used

Question 3

what are missing markets?

Answer 3

missing markets occur when the incentive function of prices completely breaks down and a market fails to exist

Question 4

what is complete market failure?

Answer 4

non-excludability, a lack of enforceable property rights and goods generating externalities can create missing markets

Question 5

what is the tragedy of the commons?

Answer 5

this refers to individuals acting in a way that is contrary to what is best for society

Question 6

what are merit goods?

Answer 6

goods that are more useful for consumers than they realize therefore in a free market they will be under consumed

Question 7

what are demerit goods?

Answer 7

goods that are more harmful for consumers than they realize therefore in a free market they will be over consumed

Question 8

what is information failure?

Answer 8

consumers perceptions do not match the true costs and benefits and as a result overconsume or under consume a good