Microeconomics Markets And Externalities

Question 0

Subsides.

Answer 0

Payments from the government to encourage production or consumption by lowering the cost per unit of production/ purchase.

Question 1

Taxation as a method of internalising externalities

Answer 1

Hard to determine the size of the tax. Makes polluter pay. Refer to A 3 sheet.

Question 2

What is a market?

Answer 2

Any situation which brings together buyers and sellers for the purpose of trading goods or services.

Question 3

Price system

Answer 3

A method of allocating resources by the free movement of prices.

Question 8

What is market failure?

Answer 8

Where the free market fails to achieve economic efficiency.

Question 9

Allocative efficiency

Answer 9

Where scarce resources are used to produce g/s that consumers demand in the quantities they want, for the prices they desire. Maximum consumer welfare.

Question 10

Allocative inefficiency (not the opposite)

Answer 10

Where resources are over/under allocated to the production of a g/s.
Show on a graph.

Question 11

Positive externality/ external cost

What kind of good are they?

Answer 11

A benignity to a third party resulting from the actions of an unrelated group.
Social benefits > private benefits
Public goods.
Draw a graph.

Question 12

Third party

Answer 12

Person/group of people not involved in production/decision making.

Question 13

Private cost

Answer 13

The cost directly incurred by those undertaking a particular economic activity.

Question 14

Private benefit

Answer 14

The benefits directly incurred by those undertaking a particular economic activity.

Question 15

Social cost

Answer 15

Private cost + external cost

Question 16

Social benefit

Answer 16

Private benefit + external benefit

Question 17

Socially optimum output

Answer 17

The output quantity where full social cost = full social benefit

Question 18

Information failure

Answer 18

Information incorrect for one party…

Question 19

Asymmetric information

Answer 19

Info failure-not shared equally between two parties. One party has more knowledge than the other.

Question 20

Merit good

Answer 20

A good whose consumption is better for consumers than they realise. Therefore is under consumed in a free market.
Show graph.

Question 21

Demerit good

Answer 21

Good whose consumption is more harmful than consumers realise. Less private benefits to consumers than expected, so over consumed in free market.

Question 22

Public good

Answer 22

Good that is non excludable and non rivalrous. Not provided in a fee market due to free rider problem

Question 23

Free rider problem

Answer 23

Consumers can consume a good without being excluded so minimising the private benefit.

Question 24

Non excludable

Answer 24

Where it is technically impossible or financially unviable to restrict someone from consuming a good or service.

Question 25

Private good

Answer 25

Good both excludable and rivalrous in consumption.

Question 26

Non rivalrous

Answer 26

Consumption by one person doesn’t diminish another persons consumption.

Question 27

Quasi public good

Answer 27

Goods that are part public, part private. Have some but not all characteristics of a public good.

Question 28

Direct provision

Answer 28

Government directly steps in to provide a g/s.

Question 29

Internalising an externality.

Answer 29

An attempt to diminish an externality, by making the polluter pay it’s cost.

Question 30

Traceable permits

Answer 30

Pollution- permits the owner yo emit a certain amount of pollution. Can be sold if not required. Refer to A3 sheet.

Question 31

Provision of information

Answer 31

The government attempts to inform consumers in order to correct market failure. May also try to correct asymmetric information, so consumers have greater purchasing power. To increase consumption of merit goods and decrease that of demerit goods.

Question 32

Regulation

Answer 32

Use of the legal system to place restrictions on standards of production/ consumption. Could be a complete ban, or the requirement of a permit. Requires enforcement.
Refer to A3 sheet.

Question 33

Property rights system

Answer 33

A system which grant ownership to rid parties so they have the right to sue those creating negative externalities for compensation - internalising the externality.
Refer to A3 sheet.

Question 34

Government failure

Answer 34

A market failure that is the result of state intervention.

Question 35

Minimum price

Answer 35

A price below which g/s cannot be sold by law. Eg) there is a minimum price for alcohol.

Question 36

Economic efficiency

Answer 36

Where productive and allocative efficiency are achieved.

Question 37

Negative externality/ external cost

Answer 37

Arises when the actions of one group result in a negative side effect on a third party.
The social cost > private cost
Show on a graph

Question 38

Market failure

Answer 38

Where the free market mechanism fails to achieve economic efficiency.
Includes allocative inefficiency.

Question 39

Externality

Answer 39

Where an action taken my one economic agent (producer) has an effect on a third party not directly involved in the activity.