Theme 1.3

Question 1

Define merit goods

Answer 1

Goods deemed more beneficial to consumers than they realise

Question 2

Define demerit goods

Answer 2

Goods deemed more harmful to consumers than they realise

Question 3

Define negative externalities in production

Answer 3

Costs to 3rd parties s a result of the actions of producers

Question 4

Give examples of negative externalities in production

Answer 4

Air pollution

Resource depletion

Deforestation

Question 5

On a diagram, how do we show the impact of NE in production

Answer 5

MSC>MPC

Question 6

What is the equation for Social costs

Answer 6

Private costs + External costs

Question 7

Define positive externalities in consumption

Answer 7

Benefits to 3rd parties as a result of the action of consumers

Question 8

Give examples of PE in consumption

Answer 8

Healthcare
Education
Exercise
Healthy eating

Question 9

On a diagram, how do we show the impact of PE in consumption

Answer 9

MSB>MPB

Question 10

Define externalities

Answer 10

The cost/benefit a third-party receives from economic transaction outside of the price mechanism

Question 11

Define market failure

Answer 11

Where the free market fails to allocate scarce resources at the socially optimum level of output

Question 12

Why are non rivalrous and non-excludable goods under provided by the private sector?

Answer 12

Due to the free rider problem

Question 13

Describe the free rider problem & missing market

Answer 13

Where individuals have the incentive to not contribute anything to the provision of the public good-> they wait for others to pay so they can free ride on the benefits-> if everyone acts this way, no one will pay-> there’s no private motive to supply them-> none supplied in the free market-> creates a missing market + complete market failure as there’s huge demand for these socially desirable goods

Question 14

Describe non-excludable goods

Answer 14

This is when no one can be charged for a P.G that excludes others that haven’t paid.

The benefits of consuming the good can’t be confined to the individual that has paid.

There’s no cost-efficient way to price however technology can help from changing public goods to private goods.

Question 15

Describe non-rivalrous goods

Answer 15

The quantity available of a good doesn’t diminish upon consumption.

Question 16

Give examples of public goods

Answer 16

Food defences, road signs, street lights

Question 17

Give evaluation for public goods

Answer 17

Quasi public goods- a good that sometimes shows the characteristics of both a pure public and private good

Question 18

Explain two examples of quasi public goods- evaluation

Answer 18

Roads- (excludable) e.g toll roads- w/ use of tech it can be a camera that captures license plates. (Rivalrous) during peak time where road space does diminish upon consumption.

Beach : (excludable) e.g hotel can own a beach and only provide access to those who’ve paid. (Rivalrous) peak time e.g summer holidays - 1 person using the beach= less availability for others

Question 19

Formula for MSB

Answer 19

MPB+ External costs

Question 20

Formula for MSC

Answer 20

MPC + external costs

Question 21

Social welfare will be maximised when what condition is met

Answer 21

MSB=MSC

Question 22

Private welfare will be maximised when what condition is met

Answer 22

MPB=MPC

Question 23

Formula for MSB

Answer 23

MPB + external benefit

Question 24

Define specific tax

Answer 24

Tax per unit of a good or service

Question 25

Define Ad valorem

Answer 25

Tax calculated as a percentage of the price of a good or service

Question 26

Define direct tax

Answer 26

Tax on income e.g income tax

Question 27

Define indirect tax

Answer 27

Tax on expenditures e.g sugar tax

Question 28

Identify 2 factors which will influence the size of the shortage created after a maximum price has been imposed

Answer 28

Elasticities of supply and demand Level of minimum price

Question 29

Define private costs

Answer 29

the costs incurred by producers or consumers directly involved in a transaction or economic activity. These costs are borne by the parties directly engaged in the production or consumption of a good or service.

Question 30

Give an example of private costs

Answer 30

In the production of a car, private costs include the cost of labor, raw materials, and manufacturing equipment

Question 31

Define external costs (negative externalities)

Answer 31

External costs are costs imposed on third parties who are not part of the transaction or activity. These costs are not considered by the parties directly involved and are often detrimental to society.

Question 32

Give an example of external costs

Answer 32

Air pollution caused by a factory's emissions imposes external costs on nearby residents, leading to health problems and environmental damage.

Question 33

Define social costs

Answer 33

Social costs represent the total costs of an economic activity, including both private costs and external costs. They reflect the overall impact of an activity on society, accounting for both direct and indirect costs

Question 34

Give an example of social costs

Answer 34

If a factory's production generates pollution, SC incl not only the factory's production costs but also the costs of healthcare for affected residents and environmental cleanup.

Question 35

Define private benefits

Answer 35

the benefits received by producers or consumers directly involved in a transaction or economic activity. These benefits are enjoyed by the parties directly engaged in the production or consumption of a good or service.

Question 36

Give an example of private benefits

Answer 36

PB of education include improved job prospects and higher earning potential for individuals who receive education.

Question 37

Define external benefits (positive externalities)

Answer 37

benefits received by third parties who are not part of the transaction or activity. These benefits are often beneficial to society but are not considered by the parties directly involved

Question 38

Give an example of external benefits

Answer 38

Vaccination not only benefits the vaccinated individual by preventing disease but also benefits the community by reducing the spread of the disease

Question 39

Define social benefits

Answer 39

the total benefits of an economic activity, including both private benefits and external benefits. They reflect the overall positive impact of an activity on society, accounting for both direct and indirect benefits.

Question 40

Give an example of social benefits

Answer 40

If a company invests in employee training, social benefits include not only increased productivity and job satisfaction for employees (private benefits) but also higher workforce skills that benefit the broader economy (external benefits).

Question 41

Give the impact of negative externalities on producers, consumers and the overall impact

Answer 41

Producers may not fully account for external costs, leading to overproduction of goods with negative externalities. Consumers may not fully consider external costs, leading to overconsumption. Overall, negative externalities can result in market inefficiencies and reduced social welfare

Question 42

Give the impact of positive externalities on producers, consumers and the overall impact

Answer 42

Producers may not capture all external benefits, leading to underproduction of goods with positive externalities. Consumers may not fully appreciate external benefits, leading to underconsumption. Overall, positive externalities can result in underallocation of resources to beneficial activities.

Question 44

Gov intervention on externalities

Answer 44

Government intervention can correct externalities through policies such as taxes and subsidies. Taxes on negative externalities (e.g., carbon taxes) internalize external costs, reducing overproduction. Subsidies on positive externalities (e.g., education subsidies) encourage greater provision of beneficial goods and services. Regulations can also be used to limit external costs (e.g., emissions standards) or promote external benefits (e.g., safety regulations).