Market Failures
When the market naturally fails to deliver an efficient outcome
Market Failure
A negative externality of production is naturally ___and ___ by the market
Over produced and under priced
These goods are non-rival and are non-excludable.
What are public goods?
What is a demerit good
A good that society considers to be harmful or negative to the good of communities
This is the name for the lost efficiency created by market failure.
DWL (Dead weight loss)
A numerical limit on how much of something is allowed to be produced.
What is a quota?
A positive externality of production is naturally ______and _____ by the market
under produced and over priced
Why is a school not a public good?
It is excludable by price
What is the definition of price elasticity of demand
The responsiveness of the quantity demand to a change in price.
represents the total cost to society, measured by private marginal cost plus the external marginal cost.
External Costs
A negative consumption externality may be reduced using this...
Tax, negative advertising campaign
A positive externality of consumption is naturally _______ and ______ by the market
Under produced and over priced
The _____ problem describes the idea that people can consume public goods without paying meaning there is no incentive for establishment or paying for establishment
Free rider problem
The responsiveness of the quantity supplied to a change in price.
What is meant by internalizing the externality
Aligning the private benefits/costs with the social benefits/costs to make the consumers and producers act in a way that it allocatively efficient
A positive externality may be corrected using this?
A negative externality of consumption is naturally _______ and _____ by the market
Over produced and under priced
Why is a parking lot with 30 spots not a public good.
Because it is rival, the consumption of this will eventually cause someone to miss out.
Some say that if a factory is polluting a small lake next to it the pollution is a result of lacking property rights. Why would giving someone ownership of the lake lead to a more allocatively efficient outcome?
Because if someone owns the lake they will take legal action against the polluter and incentive less production, leading to a movement towards the more socially desirable Q
If this is achieved then market failure is solved.
Allocative efficiency
Will a minimum price be successful in solving a positive externality of consumption.
No, a price floor makes the market price not able to drop below a certain level, reducing the market quantity demanded. Because Positive externalities are under produced naturally, they need to be increased in production.
Why is a tax successful at reducing market failure involved in a negative externality of consumption.
Use the words "Marginal cost curve" in your answer
Because it increases cost of production, shifting MSC left to MSC + tax. This reduces the market quantity towards the socially desirable Quantity.
In the graph for a public good why is marginal cost 0
Because once established the additional cost of providing one more unit is 0
Why would adding a tax to the market for cigarettes be less effective in reducing quantity demanded than adding a tax on the consumption of juice.
Because the same per unit indirect tax on an inelastic good will cause a smaller decrease in the Qd than when implemented in a relatively elastic demanded market like juice