Why governments intervene

Question 1

Explain social efficiency

Answer 1

A situation where it is impossible to change production/consumption so that anyone is better off without making someone else worse off. Optimal balance!
Marginal social benefit = Marginal social cost
Often markets fail to achieve this

Question 2

Explain equity

Answer 2

The fair distribution of a societies resources

Question 3

Explain private efficiency

Answer 3

Marginal benefit = Marginal cost (Looking purely at the firm)

Question 4

Explain economic regulation

Answer 4

Any intervention of government in the market, including taxes/subsidies and explicit legislative/administrative controls over rates, entry and other facets of economic activity

Question 5

What is the public interest theory view on regulation

Answer 5

Regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices

Question 6

What is the capture theory view on regulation

Answer 6

Regulation is supplied in response to the demands of interest groups seeking to maximise the income of their members (knowledgeable in the field, looking to protect their membership)

Question 7

Give seven market failures

Answer 7

Public goods
Common resources
Market power
 Imperfect information
Immobility of factors and time lags
Protecting people’s interests
 Externalities

Question 8

Define externalities

Answer 8

Costs or benefits of production or consumption experienced by society but not by the producers and consumers themselves - measure of the difference between marginal cost/benefit and marginal social cost/benefit

Question 9

Define external benefits

Answer 9

Benefits from production (or consumption) experienced by people other than the producer (or consumer)

Question 10

Define external costs

Answer 10

Costs from production (or consumption) experienced by people other than the producer (or consumer)

Question 11

Define social cost

Answer 11

Private cost plus externalities in production

Question 12

Define social benefit

Answer 12

Private benefit plus externalities in consumption

Question 13

If there are external benefits present what can we deduce about MSC and MC . Likewise if there are external costs present

Answer 13

Studying external Benefits - MSC are higher ( more to the right) than MC - indicating the benefit
Studying external costs MSC is lower than MC (more to the left)

Question 14

Where is socially optimum level of production

Answer 14

Social optimum outcome of producing where MR = MSC

Question 15

Where is social efficiency reached in consumption

Answer 15

Social efficiency occurring where MB(usually equals demand)=MC aligned

Question 16

Define Non rivalry goods

Answer 16

Where the consumption of a good or service by one person will not prevent others from enjoying it.

Question 17

Define non-excludability goods

Answer 17

Where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy.

Question 18

Explain a public good

Answer 18

A good or service which has the features of non-rivalry and non-excludability so private enterprise will not choose to provide it (and as a result would not be provided by the free market because there’s no mechanism for getting people to pay for it) Ex: Street Lamps, flood defences (freely available)

Question 19

Explain the free rider problem

Answer 19

When it is not possible to exclude other people from consuming a good that someone has bought.

Question 20

Define the tragedy of the commons

Answer 20

Where resources are commonly available at no charge, people are likely to overexploit them

Question 21

Why is monopoly power a market failure for social efficency

Answer 21

Monopolies vs competitive market

Monopolies won’t produce at the level where MSB=MSC=P because of the lack of competition

Question 22

Explain the deadweight welfare loss in monopoly structure

Answer 22

A deadweight loss is a cost to society created by market inefficiency.
Market with a unique price - there will be a split with the overall level of surplus and between consumer, producer. The producer gets anything below which the consumer paid

Question 23

Define a surplus from production

Answer 23

Diff between MC and potential MR associated w production of a product
This surplus is split between consumer and producers

Question 24

Give an example where consumer surplus ceases to be possible

Answer 24

First-degree price discrimination market done perfectly - consumer surplus goes to zero

Question 25

Define merit goods

Answer 25

Merit goods: Goods which the government feels that people will under-consume and which therefore ought to be subsidised or provided free ex: Full cost of third-level fees

Question 26

Explain the market failure of protecting interests

Answer 26

Involves protecting dependents and their needs
Poor economic decision making by individuals - stop foolish decisions.
Provision of merit goods

Question 27

Explain the immobility of factors as a market failure

Answer 27

Some factors of production can be immobile; e.g. labour may be immobile across both geography and occupation

Question 28

Explain the time lags market failure

Answer 28

Many economic actions can take a long time to take effect; this can cause problems of instability and an inability of the economy to achieve social efficiency

Question 29

Explain asymmetric information

Answer 29

occurs when different sides in an economic relationship have different amounts of information

Question 30

Explain the market failure imperfect information

Answer 30

In practice, this is a reality. Perfect competition assumes perfect knowledge of costs and benefits