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| Question | Answer |
| What are the main causes of market failure? | Monopoly power, Externalities, Merit and Demerit goods, Public goods, Imperfect information, Resource immobility, Unstable commodity prices and An unfair distribution of income. |
| What are positive externalities? | Positive externalities are benefits to third parties either from the production or consumption of a good, normally under-valued in a free market. |
| What are negative externalities? | Negative externalities are costs on third parties from the consumption or production of a good, in which no appropriate compensation is paid. |
| Why do markets fail to produce an optimal resource allocation from societies perspective? | Because market transactions reflect private costs and benefits alone, and so it is difficult to measure external costs and benefits. |
| What is a merit good? | A merit good is underprovided in a market economy, as the price mechanism allocates fewer resources to their production than is thought socially desirable. |
| What are a few examples of merit goods? | Best example is Healthcare, which would be substantially under provided in a pure free market economy, because MSB are greater than MPB. |
| Draw a diagram to illustrate merit goods. | |
| Draw a demerit good diagram. |
Image:
demerit-goods-1 (image/jpg)
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| What is a demerit good? | A demerit good is a good that is over provided in the market economy. The price mechanism allocates more resources to their production than is thought socially desirable. |
| What are some examples of demerit goods? | Cigarettes, Alcohol, Drugs, normally of an addictive nature. |
| What are the two key features of public goods? | 1. Non-excludability 2. Non-rivalry in consumption |
| What are the three main causes of government failure? | 1. Inadequate information 2. Conflicting objectives 3. Administrative costs |
| How can buffer stock schemes theoretically stabilise prices? | By having a price that is set at the long run average, so that in times of shortage the government releases stock onto the market, whilst in times of surplus the government intervention buys. |
| What are the equity related issues of buffer stock schemes? | Often the schemes act like minimum price schemes due to political pressure for the average price to be set above the long run average. This is favourable to producers, yet consumers may face higher prices, creating less welfare and perhaps more waste. |
| What are potential downsides of buffer stock schemes? | If the majority of producers are not part of the scheme it becomes less effective, as producers undercut the target price in times of surplus. Furthermore, administrative costs of storing the buffer stock may be excessive, and some commodities are perishable which may mean waste is created. |
| What is the definition of price elasticity of demand? | The responsiveness of demand of a good/ service to a change in the goods own price. |
| Define cross elasticity of demand. | The responsiveness of demand for one good to a change in the price of another good. |
| Define income elasticity of demand. | Income elasticity of demand is defined as the responsiveness of demand to a change in income. |
| Define price elasticity of supply. | Price elasticity of supply is the responsiveness of quantity supplied to a change in the goods price. |
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