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What is allocative efficiency?
Allocative efficiency is the term used to describe the allocation of scarce resources in a manner that satisfies the wants of society.
List three consequences of market failure?
Retrenchment, Unemployment, Economic Depression, A Rise in the Poverty Level, A Decline in the provision of social welfare.
State the two types of externalities?
Positive externality, Negative externality
Explain the concept 'economic depression'.
This occurs when there is falling output in the economy and rising unemployment over a period of time.
What is the criteria for allocative efficiency?
Price = Marginal Cost
What is deadweight loss?
A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium. It can be applied to any deficiency caused by an inefficient allocation of resource.
Explain the term retrenchment.
This occurs when workers lose their jobs due to the declining activities of a firm. If a firm that is producing a negative externality is forced to reduce output or close down, workers will be retrenched. When the firm produces less output, it will use less factor inputs – land, labour, capital and entrepreneurship. If monopolies reduce economic activity due to government restrictions, retrenchment will occur.
Define unepmployment.
Unemployment refers to a situation where persons of the working age population are willing and able to work and are actively seeking a job but is unable to find one.
True or False. Merit goods are overproduced in the economy.
False
Differentiate between positive externality and negative externality giving an example of EACH.
Positive externalities are spill over benefits to third parties while negative externalities are spill over costs to third parties. [Your example]
State four causes of market failure?
The provision of public goods (lack of), Externalities, Monopolies, The provision of merit goods(lack of)
Explain the concept 'missing market'.
There is a market/demand for the good but no private individual/firm is willing to produce the good because od property right issues.
Explain why education is considered a merit good.
Provided by the state on the basis of need or merit.
What are some of the factors that can lead to an increase in poverty?
Unemployment, Poor health services, Decrease in social welfare, Decline in ecucation
Explain why health is considered a merit good.
Provided by the state on the basis of need/merit/
What is social welfare?
Organized public or private social services for the assistance of disadvantaged groups specifically.
Differentiate between production and consumption externalities. Give examples of each.
Production externality refers to a side effect from an industrial operation, such as a chemical company leaking improperly stored chemicals into the water table. Production externalities can be measured in terms of the difference between the actual cost of production of the good and the real cost to society at large. Consumption externalities is when individual's consumption of a good or service impacts the well-being of others who are not compensated/charged by the individual.
Who are third parties?
A third party is a market participant who is external to a transaction but can be affected positively and negatively.
How do monopolies result in market failure?
High Prices and low output [Elaborate]. Not allocatively efficient (P does not equal MC).
How does market failure lead to an increase in the level of poverty?
(Underproduction of Merit Goods) When people are out of jobs, and health and education services are produced in insufficient quantities and at very high prices, this leads to an increase in poverty. The poor do not have jobs and cannot afford the level of education to make them employable. They also cannot afford expensive healthcare, so might be sick and unable to work and might even be victims of firms creating negative externalities in the community. They have to buy goods and services from firms selling at high monopoly prices. They have no avenue to escape the poverty that is the result of market failure. Unless the government intervenes to provide merit goods and public goods and to reduce negative externalities, the poor will remain in poverty.
State why education would be under consumed in a free market.
Unequal distribution of income/wealth. The government hardly intervenes in the market; hence they would have limited amout of government revenue to allocate to subsidizing or providing education.
What is market failure?
Market failure is the inability of the market to allocate resources efficiently to best satisfy society’s needs. In this case there is allocative inefficiency where there is either excess supply or excess demand.
How can the government intervene in the monopoly market to reduce market failure?
passing laws discouraging or limiting the formation of monopolies.
2. encouraging firms to enter industries where there are monopolies.
3. taking over industries where monopolies cannot be avoided – for example water and electricity- and thereby regulating prices (water and electricity rates).