Definitions
External costs are the negative side-effects of production or consumption incurred by third parties for which no compensation is paid.
For example, a car driver does not pay for the cost of the congestion and air pollution created when driving the car
External cost
» laws regulating where people can drive, cycle and gamble
» regulations imposed to make sure children are vaccinated against certain diseases
» laws making it illegal for people to eat or to talk on a mobile phone while driving
» motorcyclists being made to wear a helmet and car passengers having to wear seat belts
» airport authorities regulating the number of night flights.
Governments can also impose rules and regulations in an attempt to solve market failure.
flood control systems
national defence
public fireworks displays
lighthouses
Public good
Maximum price
Students draw and explain it
What does a PES of 0.8 indicate?
A Supply is elastic B Supply is perfectly elastic
C Supply is perfectly inelastic D Supply is inelastic
A
The actual costs of a firm, individual or government.
For example, the driver of a car pays for the insurance, licence, petrol and cost of purchasing the car
Private costs
a car owner gains the benefi t of driving the car and owning a means of private transportation. Similarly, a person who owns a garden enjoys the personal benefi ts of having green space and plants, fl owers and possibly vegetables.
Private benefits
education » healthcare services » vaccinations » research and development » work-related training schemes » subsidised housing » museums » public libraries
Minimum price
Students draw and explain
Which is NOT a disadvantage of the market economic system?
A environmental issues B incentives to work
C income inequalities D social hardship
B
One cause of market failure is factor immobility. This occurs when it is difficult for factors of production to move or switch between different uses or locations.
What are the two types?
Geographical immobility;
Occupational immobility.
From the case of a vaccination against tuberculosis or training of first-aid, explain external benefits
External benefits are the positive side-effects of production or consumption experienced by third parties for which no money is paid by the beneficiary
THREE ways to discourage demerit goods
education
indirect tax
Put indirect taxation on demerit good
Students draw and explain
Which is NOT a characteristic of a merit good?
A over-provided B provides social benefits
C under-consumed D under-provided
A
Nationalization
Nationalisation is the purchase of private sector assets by the government.
Pros and cons of a maximum price
Pros: make products more affordable and encourage consumption; protect the interest of consumers; merits from soaring prices, such as escalating rents or higher food prices.
Cons: price ceilings distort market forces and therefore can result in an ineffi cient allocation of scarce resources.
Subsidy
Education (Advertising)
Rules and regulation
Maximum price
Direct provision
Subsidy to encourage consumption of a good
Students draw and explain
In what circumstance would supply of a product be elastic?
A It is costly to produce
B It takes time to produce
C It can be stored
D It uses resources which are in short supply
C
Privatisation
Privatisation is the transfer of the ownership of assets from the public sector to the private sector
The cause of market failure
Students can answer from multiple angles
List the Five examples of Direct Provision
Examples are:
education, healthcare, public libraries, parks, museums, public roads and motorways (highways), garbage or refuse collection, street lighting, street signs and national defence
List TWO government measures that aim to solve market failure through demand sides
Rules and regulations;
Education
Which type of goods would be over-produced if left to market forces?
A Basic necessities
B Capital goods
C Demerit goods
D Public goods
C