Economics Market Failure and Government Intervention Syllabus

Market Failure and Government Intervention syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Market Failure and Government Intervention in Economics, not a summary of it.

1. 1

   Types of Market Failure

   4 topics

   • Externalities
   • Public Goods
   • Merit and Demerit Goods
   • Information Asymmetry
2. 2

   Government Intervention

   4 topics

   • Indirect Taxes and Subsidies
   • Price Controls
   • Tradable Permits and Pollution Control
   • Regulation and Provision
3. 3

   Government Failure

   3 topics

   • Unintended Consequences
   • Regulatory Capture
   • Information and Administrative Costs
4. 4

   Inequality and Welfare

   3 topics

   • Distribution of Income and Wealth
   • Poverty
   • Redistribution Policies

Market Failure and Government Intervention flashcards for Economics

18 of 51 cards from the Market Failure and Government Intervention deck — real questions with worked answers.

1. What is market failure?

   A situation in which the free market, left alone, fails to allocate resources efficiently, producing an outcome that is not Pareto/allocatively optimal (marginal social benefit does not equal marginal social cost).

2. Define an externality.

   A cost or benefit imposed on a third party who is not involved in a market transaction, causing a divergence between private and social costs or benefits.

3. Write the condition for allocative efficiency (the social optimum) in terms of marginal social benefit and marginal social cost.

   $MSB = MSC$

4. How are Marginal Social Cost and Marginal Social Benefit decomposed into private and external components?

   $MSC = MPC + MEC$ and $MSB = MPB + MEB$, where MEC is the marginal external cost and MEB the marginal external benefit.

5. For a good with a negative production externality, how do the free-market output and the social optimum compare?

   Because $MSC > MPC$, the market overproduces: the free-market quantity $Q_{market}$ exceeds the socially optimal quantity $Q^{*}$ (where $MSC = MSB$).

6. What is the deadweight welfare loss from a negative externality?

   The net welfare loss (lost social surplus) arising from output beyond the social optimum, equal to the area between the MSC and MSB curves over the overproduced units.

7. Give an example of a negative consumption externality and its market outcome.

   Cigarette smoking (passive smoking harms others): $MPB > MSB$, so the market overconsumes relative to the social optimum.

8. Give an example of a positive consumption externality and its market outcome.

   Vaccination or education (benefits spread to others): $MSB > MPB$, so the market underconsumes relative to the social optimum.

9. State the Coase theorem.

   If property rights are clearly defined and transaction costs are negligible, private parties can bargain to an efficient allocation regardless of who initially holds the rights.

10. Define a public good and name its two defining characteristics.

    A good that is non-rival (one person's consumption does not reduce the amount available to others) and non-excludable (people cannot be prevented from consuming it), e.g. national defence.

11. What is the free-rider problem?

    Because public goods are non-excludable, individuals can consume them without paying, so no one has an incentive to pay; the market under-provides or fails to provide the good, justifying government provision.

12. Distinguish a pure public good from a quasi-public good.

    A pure public good is fully non-rival and non-excludable (e.g. national defence); a quasi-public good has these traits only partially (e.g. a road that can become congested (rival) or tolled (excludable)).

13. Classify goods using rivalry and excludability into four types.

    Private (rival + excludable), Public (non-rival + non-excludable), Common resources (rival + non-excludable), Club/quasi goods (non-rival + excludable).

14. Define a merit good.

    A good that is under-consumed in the free market and yields greater private and social benefits than individuals realise (information failure); typically has positive externalities, e.g. education, healthcare.

15. Define a demerit good.

    A good that is over-consumed in the free market and is more harmful to the consumer and society than individuals realise; typically has negative externalities, e.g. tobacco, alcohol, drugs.

16. Why do merit and demerit goods represent market failure beyond externalities?

    They involve information failure and imperfect/bounded rationality: consumers misjudge the true private benefits or costs, so consumption diverges from the socially optimal level even ignoring third-party effects.

17. What is the value judgement problem with merit and demerit goods?

    Classifying a good as 'merit' or 'demerit' is normative (paternalistic): it assumes the government knows better than the individual what is good for them, which is subjective.

18. Define information asymmetry.

    A situation where one party in a transaction has more or better information than the other, leading to inefficient outcomes; it takes the forms of adverse selection and moral hazard.

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