Podcast
Questions and Answers
What characterizes a public good?
What characterizes a public good?
- It is produced by private suppliers for profit.
- It leads to negative externalities only.
- It can be easily withheld from non-payers.
- It is non-exclusionary and non-rival in consumption. (correct)
Why do private businesses typically not supply public goods?
Why do private businesses typically not supply public goods?
- They can easily charge high prices for them.
- They are not interested in government regulations.
- They produce only private goods.
- They cannot exclude non-payers from using them. (correct)
What is a characteristic of private goods?
What is a characteristic of private goods?
- They are non-rival in consumption.
- They are exchanged voluntarily in the market. (correct)
- They are provided free of charge by the government.
- They are unable to generate positive externalities.
What defines a negative externality?
What defines a negative externality?
What is a common reason for market failure?
What is a common reason for market failure?
How do governments generally respond to positive externalities?
How do governments generally respond to positive externalities?
Which of the following is an example of a public good?
Which of the following is an example of a public good?
What is meant by a good being non-rival in consumption?
What is meant by a good being non-rival in consumption?
What is the government's response to positive externalities?
What is the government's response to positive externalities?
What is a consequence of negative externalities?
What is a consequence of negative externalities?
What role does imperfect information play in market failure?
What role does imperfect information play in market failure?
What is meant by 'full employment' in an economy?
What is meant by 'full employment' in an economy?
Why does the government try to promote price stability?
Why does the government try to promote price stability?
Which of the following is a cause of economic growth?
Which of the following is a cause of economic growth?
What is the significance of well-defined property rights in an economy?
What is the significance of well-defined property rights in an economy?
What impact does high transaction cost have on trade?
What impact does high transaction cost have on trade?
Flashcards
Market Failure
Market Failure
A situation where the market fails to allocate resources efficiently, leading to a socially undesirable outcome.
Externality
Externality
A benefit or cost experienced by someone who is not directly involved in a transaction.
Positive Externality
Positive Externality
An externality that benefits a third party.
Negative Externality
Negative Externality
An externality that harms a third party.
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Public Good
Public Good
A good that can be excluded from non-payers and is not consumed less when more people use it.
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Private Good
Private Good
A good that can be excluded from non-payers and is consumed less when more people use it.
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Non-Exclusionary Good
Non-Exclusionary Good
A good that is non-exclusionary, meaning providers cannot stop people from using it, even if they don't pay for it.
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Non-Rivalrous Good
Non-Rivalrous Good
A good that is non-rivalrous, meaning one person's consumption does not diminish the amount available for others.
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Externalities
Externalities
When the production or consumption of a good or service affects a third party not involved in the transaction, creating spillover effects.
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Positive Externalities
Positive Externalities
When the benefits of a good or service extend beyond the buyer and seller, creating a positive impact on society.
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Negative Externalities
Negative Externalities
When the costs of a good or service extend beyond the buyer and seller, creating a negative impact on society.
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Imperfect Information
Imperfect Information
When buyers and sellers lack complete information about the good or service being traded, potentially leading to inefficient decisions.
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Legal Framework
Legal Framework
The government's role in providing a legal framework for economic activity, including protecting property rights and enforcing contracts.
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Economic Goals
Economic Goals
The government aiming for a healthy economy by promoting full employment, stable prices, and sustained economic growth.
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Full Employment
Full Employment
The government's efforts to maintain a healthy economy by aiming for a situation where most workers have jobs.
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Externalities and Public Goods
- Externalities: Third-party benefits (positive externalities) and costs (negative externalities) occur when a transaction affects those not directly involved. Governments often intervene to manage these effects.
- Positive Externalities: Governments may subsidize or provide goods with positive externalities to encourage greater consumption, as these goods/services have benefits greater than those for the buyer.
- Negative Externalities: Governments might impose taxes or regulations to reduce negative externalities, as these goods/services impose costs on society exceeding the seller's costs.
- Private Goods: Produced by private suppliers, consumers pay for them and access is limited to those who can afford it.
- Public Goods: Provided by the government (e.g., national defense, lighthouses, streetlights), and characterized by non-exclusion (anyone can use them) and non-rivalry (one person's use doesn't diminish another's).
Market Failure
- Market Failure: Occurs when the unrestrained market produces a socially undesirable outcome – the cost to society outweighs the benefit. Externalities and public goods are examples.
- Reasons for Market Failure:
- Restrictions on Competition: Governments may intervene if firms significantly limit competition to the detriment of consumers.
- Public Goods: The market alone won't provide public goods like streetlights or flood control, as companies can't profit from supplying them.
- Externalities: Positive and negative externalities, necessitating government intervention to align private and social benefits/costs.
- Imperfect Information: Buyers and sellers lack perfect information, leading to suboptimal decisions. Gathering information is costly, and the future is uncertain.
Government's Role in the Economy
- Defining Laws and Contracts: A crucial economic function is creating and enforcing rules and regulations (e.g., property rights), essential for trade and economic well-being.
- High Transaction Costs: In cases with high transaction costs, trade may not occur, even if the value to all parties is high.
- Promoting Economic Goals: The government promotes a strong economy through various policies:
- Full Employment: Maintaining a state where approximately 95% of the workforce is employed is considered full employment.
- Price Stability: Preventing rapid increases in prices (inflation).
- Economic Growth: Increasing the overall output and quality of goods and services produced. Factors like population growth and technological advancements drive economic growth.
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