microeconomics market failure key terms

Question 1

market failure

Answer 1

When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity

Question 2

Complete market failure

Answer 2

A market fails to function at all and a ‘missing market’ results

Question 3

Partial market failure

Answer 3

A market does function but it delivers the wrong quantity of a good or service which results in resource misallocation

Question 4

Missing market

Answer 4

A situation in which there is no market because the functions of prices have broken down

Question 5

Public good

Answer 5

A good such as a radio programme that is non-excludable and non-rival

Question 6

Private good

Answer 6

A good such as an orange that is excludable and rival

Question 7

Excludable good

Answer 7

People who do not want to pay can be excluded from benefiting the good

Question 8

Rival good

Answer 8

When one person consumes a private good the quantity available to others diminishes

Question 9

Quasi public good

Answer 9

A good which is not fully non-rival and / or where it is possible to exclude people from consuming the product

Question 10

externality

Answer 10

Knock on effects of economic transactions upon third parties that exist when there is in divergence between private and social costs and benefits

Question 11

Positive externality

Answer 11

An external benefit of that occurs when the consumption or production of a good causes a benefit to a 3rd party where the social benefit is greater than the private benefit

Question 12

Private cost

Answer 12

Expenses or costs incurred by an individual or firm in the production or consumption of goods and services

Question 13

Social benefit

Answer 13

The total benefit of an activity including the external benefit as well as the private benefit. As the equation social benefit = private benefit + external benefit

Question 14

Private benefit

Answer 14

Personal gains or benefits that individuals or firms receive from the consumption or production of goods and services

Question 15

Negative externality

Answer 15

An external cost that occurs when the consumption or production of a good causes costs to a third party whether social cost is greater than the private cost

Question 16

Social costs

Answer 16

The total cost of an activity including the external costs as well as the private cost expressed as an equation social cost= Private cost+ External cost

Question 17

Information failure

Answer 17

Occurs when people make wrong decisions because they do not process or if they ignore relevant information they are often of myopic / shortsighted about the future

Question 18

Environmental market failure

Answer 18

Situation where the free market fails to Efficiently allocate resources and address environmental issues

Question 18

Property rights

Answer 18

the exclusive authority to determine how a resource is used/ Legal rights and ownership that individuals or firms have over assets or resources

Question 18

Tragedy of the Commons

Answer 18

Shared all common resources overexploited or depleted due to lack of individual responsibility or ownership

Question 19

Merit good

Answer 19

A good such as health care for which a social benefits of consumption exceed the private benefits. Judgments are involved in deciding that a good is a merit good

Question 20

Demerit good

Answer 20

Goods such as tobacco for which their social costs of consumption exceed the private costs. Judgments are involved in deciding that a good is a demerit good

Question 21

Occupational immobility

Answer 21

When workers are unwilling or unable to move from one type of a job to another for example because different skills are needed

Question 22

Geographical immobility

Answer 22

When workers are unwilling or unable to move from one area to another in search of work

Question 23

Asymmetric information

Answer 23

When one party to a market transaction possesses less information relevant to the exchange than the othere.g., seller of a second hand car who doesnt disclose all the faults the vehicle has

Question 24

monopoly

Answer 24

an extreme example of a market structure where only one firm supplies to the market

Question 25

indirect tax

Answer 25

Expenditure taxes that increase cost of production for firms but can be transferred to consumers via higher prices

Question 26

subsidy

Answer 26

a money grant to firms by the government to reduce costs of production and encouraging increased output

Question 27

Minimum price

Answer 27

A fixed price / price floor enacted by the government usually set above the equilibrium price, can distort markets and create excess supply

Question 28

Maximum price

Answer 28

A fixed price/ price ceiling enacted by the government usually set below the equilibrium market price, Can distort markets by creating access demand

Question 29

Regulation

Answer 29

rules/ laws enacted by the government that must be followed by the economic agents to encourage a change in behaviour

Question 30

pollution permits

Answer 30

Market based approach to control pollution Set a limit on the total amount of pollution that can be emitted by various industries these permits can be bought sold or traded amongst these industries

Question 31

free rider problem

Answer 31

a situation where some individuals benefit from a public good or service without contributing to its cost.