what are externalities?
third party effects arising from production and consumption of goods and services
1 of 33
what is the formula for social cost?
private costs + external costs = social cost
2 of 33
what is social benefit?
is the total benefit to society from consuming a good.
marginal social benefit (MSB) + marginal private benefit (MPB) = externality
3 of 33
if negative production externalities are ignored what can this lead to?
4 of 33
what can be a consequence of ignoring positive externalities in consumption?
5 of 33
ignoring negative consumption externalities can lead to what?
6 of 33
what can happen if positive production externalities are ignored ?
7 of 33
what are merit goods
3 examples
goods whose consumption is regarded to being beneficial to society, the social benefits of consumption exceed the private benefits and are under provided by the market mechanism

eg, healthcare, education, public parks
8 of 33
two reasons why merit goods are under provided
1. in the free market the positive externalities that merit good provide are ignored, and production and consumption will be below the socially optimum level
2. due to imperfect information, consumers don’t always realise the full benefits that merit goo
9 of 33
what are demerit goods
3 examples
goods whose consumption is regarded as harmful to consumers but consumers are usually unaware ( or don’t care) about the harm caused eg addicts
the social cost of consumption exceed the private costs and are overprovided by the market mechanism

eg cigs
10 of 33
two reasons why demerit goods tend to be over consumed
1. in free market the negative externalities demerit goods caused are ignored so production and consumption will be above socially optimum level
2. due to imperfect information between buyers and sellers, don’t always realise hard demerit goods cause. Go
11 of 33
what are public goods
a good that is non excludable and non rival
eg street lighting
12 of 33
what does non excludability mean
people cannot be stopped from consuming the good even if they haven’t paid for it
eg, boats and light from lighthouse
13 of 33
what is a private good
a good that is excludable and rival eg bread
14 of 33
why are public goods under provided in free market?
the non excludability leads to the free rider problem, which is once a public good is provided it’s impossible to stop someone benefiting from it even if unpaid for, the price mechanism cannot work if there’s free riders as consumers won’t pay if they kno
15 of 33
what is socially optimum level?
point where it is allocatively efficient to produce or consume
16 of 33
what is symmetric information
perfect information that is equally available to all participants in a market
eg in a competitive market there’s perfect info (buyers n sellers have full knowledge)
17 of 33
what is asymmetric information
when buyers or sellers have more information, information is imperfect
18 of 33
example of how information failure causes market failure
merit goods tend to be under provided and demerit goods over provided, causing a misallocation of resources, which leads to market failure
19 of 33
3 things inequality can be caused by
wage differentials, discrimination, regressive taxes
20 of 33
why do some economists argue that the unequal distribution of income and wealth is a a consequence of market failure
the free market has led to this inequitable (unfairness) distribution
21 of 33
define market failure
when the price mechanism leads to a misallocation of resources
22 of 33
how can a monopoly cause market failure
2 points ao2
inefficiency - no incentive to cut costs or be competitive, profit maximisers
restrict consumer choice - monopolies won’t necessarily act to wants and needs of customers as they set their own prices
23 of 33
explain a monopoly diagram (S&D)
market equilibrium is at point M, where market supply = Qe and price Pe. however in a monopoly there’s only one firm in the market so it could misallocate resources by retsirtucing supply to Qm and force price up to Pm
24 of 33
explain how monopoly is market failure
msrket failure causes a welfare loss of KLM, the consumer surplus id added to the firms profits. by restricting output monopolies can fail to exploit some EoS, this means that productive efficiency isn’t achieved and the firm isn’t producing output at the
25 of 33
why might monopolies have higher CoP then firms in a competitive market?
monopolies have less incentive to innovate and to make production methods as cost effective / efficient as possible
26 of 33
how does monopoly power lead to welfare loss
AO1 - monopolies are price sitters that control a market, they produce an output that maximises their profit by restricting output and raising prices - not allocatively efficient- creates a deadweight loss to society
AO2 - source of market failure bc the
27 of 33
negative and positive of economic inactivity (market failure)
❌skill shortages - if workers are in short supply, supply of labour is more inelastic, they can demand a higher wage and increase a firms CoP
✅if people are inactive so they can focus on education this is a positive long term effect - investment into futu
28 of 33
3 types of market failure in the labour market ?
asymmetric information
occupational immobility
geographical immobility
29 of 33
what is the deadweight loss caused by
overproduction of a good with negative externalities
30 of 33
‘Think Tanks in the UK have argued that there should be a red meat tax.’
what sort of market failure might this be aimed at and why?
negative consumption externalities
red meat is bad for cholesterol so health problems - cost money for government and bad for consumers.
31 of 33
‘EU fishing directives aim to limit the amount of fishing in European waters’
Why is overfishing a form of market failure?
Absence of property rights
- tragedy of the commons , depletion of resources
32 of 33
why is the government provision of education not a public good?
2 reasons
people can be excluded from enjoying the benefits of an education
private sector would provide some education (private schools)
33 of 33

Other cards in this set

Card 2


what is the formula for social cost?


private costs + external costs = social cost

Card 3


what is social benefit?


Preview of the front of card 3

Card 4


if negative production externalities are ignored what can this lead to?


Preview of the front of card 4

Card 5


what can be a consequence of ignoring positive externalities in consumption?


Preview of the front of card 5
View more cards


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Market failure resources »