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Questions and Answers
Which of the following best describes a 'public good'?
Which of the following best describes a 'public good'?
- A good that is available for use by the general public and its consumption is difficult to measure. (correct)
- A good that is exclusively consumed by individuals who pay for it.
- A good that yields positive impacts for the producer or consumer.
- A good that creates negative impacts on third-parties.
What distinguishes a 'merit good' from other types of goods?
What distinguishes a 'merit good' from other types of goods?
- It has a positive impact on society and should be consumed more. (correct)
- It has a negative impact on society and should be consumed less.
- Its consumption can be easily measured, and price can be charged for it.
- It is typically over-produced by the market due to its high demand.
A factory's air pollution is an example of:
A factory's air pollution is an example of:
- A private cost.
- An external benefit (positive externality).
- A private benefit.
- An external cost (negative externality). (correct)
Which of the following equations accurately represents 'Social Costs'?
Which of the following equations accurately represents 'Social Costs'?
Market failure is characterized by:
Market failure is characterized by:
Why are demerit goods often over-produced in a market economy?
Why are demerit goods often over-produced in a market economy?
A lack of occupational and geographical mobility of workers can cause:
A lack of occupational and geographical mobility of workers can cause:
What is a key consequence of information failure in the market?
What is a key consequence of information failure in the market?
Flashcards
What are public goods?
What are public goods?
Goods provided by the government for the benefit of all, where it's hard to charge individuals for use (e.g., streetlights, roads).
What are merit goods?
What are merit goods?
Goods that bring positive effects for society, and we should encourage their consumption (e.g., schools, hospitals).
What are external costs?
What are external costs?
Negative impacts on society from producing or using goods (e.g., pollution from a factory).
What are external benefits?
What are external benefits?
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What is market failure?
What is market failure?
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What is one cause of market failure?
What is one cause of market failure?
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How can market failure affect merit goods?
How can market failure affect merit goods?
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How does market failure affect public goods?
How does market failure affect public goods?
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Study Notes
Public Goods
- Public goods are used by a general population, benefiting everyone.
- Their consumption can't be measured, so pricing is impossible.
- Market economies typically don't produce them.
- Examples: street lights, roads.
Merit Goods
- Merit goods positively affect society.
- They should be widely used.
- Opposite to merit goods are demerit goods (alcohol, cigarettes).
- Examples of merit goods: schools, hospitals.
External Costs (Negative Externalities)
- Negative impacts on third parties due to production/consumption.
- Example: factory pollution.
External Benefits (Positive Externalities)
- Positive impacts on society due to production/consumption.
- Example: better neighborhood roads due to new business.
Private Costs/Benefits
- Private costs: costs to producer/consumer.
- Example: cost of production.
- Private benefits: benefits to producer/consumer.
- Example: vaccine benefits a consumer's immunity.
Social Costs/Benefits
- Social Costs = External Costs + Private Costs
- Social Benefits = External Benefits + Private Benefits
Market Failure
- Market failure occurs when the price mechanism fails to allocate resources effectively.
- It's a major disadvantage of market economies.
Causes of Market Failure
- High negative externalities: Social costs exceed social benefits.
- Demerit good over-provision: External costs of demerit goods (e.g., alcohol, tobacco) aren't reflected in the market, leading to overproduction.
- Merit good under-provision: External benefits of merit goods (e.g., schools, hospitals, public transport) aren't reflected, leading to underproduction.
- Lack of public goods: Consumption can't be measured and priced, so private sectors won't produce them.
- Resource immobility: Resources can't move between optimal uses (e.g., workers lack mobility).
- Information failure: Insufficient/inaccurate information between consumers, producers, and government (e.g., misleading advertising).
- Monopoly abuse: Monopolists may take advantage of consumers with high prices and limited choices.
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