Define the term market failure.
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Define the term market failure.
Market failure occurs when there is a less than optimum allocation of resources from the point of view of society.
Define the term private cost.
A private cost is what a producer, consumer, or government actually pays to produce or consume a good or service.
True or False?
The social cost includes both the private cost and the external cost.
True.
The social cost includes both the private cost and the external cost
State the meaning of the term external benefit.
An external benefit (positive externality) is the benefit not factored into the market transaction.
What is the formula used to calculate the social benefit?
The formula to calculate social benefit is:
Social benefit = private benefit + external benefit
Define the term demerit goods.
Demerit goods are goods which have harmful impacts on consumers or society, e.g drugs
What is a merit good?
A merit good is one that is beneficial to society, but consumers underconsume it as they do not fully recognise the private or external benefits.
Which term refers to the inability of private firms to exclude certain customers from using their products?
Non-excludability refers to the inability of private firms to exclude certain customers from using their products.
State what the term non-rivalry means.
Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms.
Define the term free market.
A free market is one in which there is no government intervention. The market outcomes are determined by the forces of demand and supply.
True or False?
Demerit goods are over-provided in a market and their consumption often creates external costs.
True.
Demerit goods are over-provided in a market and their consumption often creates external costs.
What is a positive externality of consumption?
A positive externality of consumption occurs when there is a positive external benefit in consumption, such as when electric vehicles are consumed and CO2 emissions fall.
How is a positive externality of production defined?
A positive externality of production occurs when there is a positive external benefit in production, such as when managed pine forests produce timber but also increase CO2 absorption.
Define a negative externality of consumption.
A negative externality of consumption occurs when there is an external cost in consumption, such as when the consumption of alcohol increases anti-social behaviour.
State the meaning of a negative externality of production.
A negative externality of production occurs when there is an external cost in production, such as when the production of electricity increases air pollution.
True or False?
Merit goods generate positive externalities.
True.
Merit goods generate positive externalities, as their consumption generates both private and external benefits.
State why public goods would be under-provided by a free market.
Public goods would be under-provided by a free market as there is little opportunity for sellers to make profits from providing these goods as they are non-excludable and non-rivalrous in consumption.
Which situation often results from the abuse of monopoly power?
The abuse of monopoly power usually means that goods or services are purposely underprovided in order to limit output, so that prices and profits increase.
What is the consequence of factor immobility?
Factor immobility results in an inefficient allocation of resources in a market (usually under-provision).
What would be the market outcome if any external costs or benefits were acknowledged?
If any external costs or benefits were acknowledged, the price and output in the market would be different.
How does the price mechanism in a free market deal with externalities?
The price mechanism in a free market ignores externalities.
Define the term external costs.
External costs occur when the social costs of an economic transaction are greater than the private costs.
What is a maximum price?
A maximum price is set by the government below the existing free market equilibrium price, and sellers cannot legally sell the good at a higher price.
State the meaning of minimum price.
A minimum price is set by the government above the existing free market equilibrium price, and sellers cannot legally sell the good at a lower price.
Define the term indirect tax.
An indirect tax is paid on the consumption of a good. If a good is not purchased, then the tax is not paid e.g. VAT
Define the term producer subsidy.
A producer subsidy is a per unit amount of money given to a firm by the government to increase production or increase the provision of a merit good.
What does the phrase state provision of public goods mean?
The state provision of public goods refers to the need for the government to provide public goods that are beneficial for society. These goods are not provided by private firms due to the free rider problem.
Define the term privatisation.
Privatisation occurs when the government transfers ownership and control of firms or assets from the state (public sector) to the private sector (private firms).
How is nationalisation defined?
Nationalisation occurs when the government takes control and ownership of firms that previously operated in the private sector.
What are minimum prices in the labour market called?
Minimum prices in the labour market are called national minimum wages.
What is regulation?
Regulation refers to laws created by the government for consumers and producers to follow. They often create regulatory agencies to monitor and enforce these laws.
State the equation for social cost.
The equation for social cost is:
Social cost = private cost + external cost
What is the equation for social benefit?
The equation for social benefit is:
Social benefit = private benefit + external benefit
Define the term national minimum wage (NMW).
A national minimum wage (NMW) is a legally imposed wage level that is set above the free market rate. This is the minimum amount per hour that employers must pay their workers.