A Level Economics 1.3.1 to 1.3.2 Market failure, Externalities

What is market failure?

• When a business fails to make profits

• When the government fails to regulate markets

• When the free market fails to allocate resources efficiently

• When consumers stop purchasing goods

What is a missing market?

• A market where goods are too expensive

• A situation where no market exists for a good or service

• A market with excessive competition

• A market with under-production

What are externalities?

• Government-imposed regulations

• Costs or benefits affecting third parties not involved in production or consumption

• Prices determined by monopolies

• Natural fluctuations in the market

What is an example of a negative externality?

• Pollution from a factory

• Increased property values due to a new park

• Education benefiting society

• Job creation from new infrastructure

How do positive consumption externalities occur?

• When consumption leads to private costs exceeding social costs

• When third parties benefit from someone's consumption of a good

• When government subsidies reduce costs

• When businesses lower prices to increase demand

What equation represents total social cost?

• Social Cost = Private Cost × Social Benefit

• Social Cost = Private Cost + External Cost

• Social Cost = External Cost ÷ Private Benefit

• Social Cost = Private Benefit − External Cost

Which of the following is an example of a positive production externality?

• Noise pollution from construction

• Job creation from building a new airport

• Air pollution from factories

• Traffic congestion caused by a new highway

How can lack of competition lead to market failure?

• By encouraging innovation

• By causing over-production

• By leading to higher prices and under-production

• By lowering the quality of goods

What are social benefits?

• The benefits consumers gain from subsidies

• The total benefits, including private and external benefits

• Only the benefits producers receive

• Government welfare programs

What is the difference between private and social costs?

• Private costs include external costs, while social costs do not

• Social costs include external costs, while private costs do not

• Private costs are always higher than social costs

• Social costs are only relevant to government projects