Market failure

What is the distinction between private costs, external costs, and social costs?

• Private costs are costs incurred by individuals or firms directly involved in an economic activity. External costs are costs imposed on third parties not directly involved. Social costs are the sum of private and external costs.

• Private costs are costs imposed on the government. External costs are costs only faced by consumers. Social costs are costs that only affect producers.

• Private costs are the sum of all costs in society. External costs are costs that benefit third parties. Social costs are costs that do not include private costs.

• Private costs are costs paid by the government. External costs are costs that only occur in public goods. Social costs are unrelated to private or external costs.

What is the distinction between private benefits, external benefits, and social benefits?

• Private benefits are benefits received by individuals or firms directly involved in an economic activity. External benefits are benefits received by third parties not directly involved. Social benefits are the sum of private and external benefits.

• Private benefits are benefits received by the government. External benefits are benefits received by firms only. Social benefits are only the benefits received by society at large.

• Private benefits are always negative, external benefits are always positive, and social benefits are unrelated to either.

• Private benefits and external benefits are the same, and social benefits are only the benefits received by the government.

Use a diagram to illustrate the external costs of production using marginal analysis.

• A diagram should show marginal private cost, marginal external cost, and marginal social cost curves, with the external cost represented as the vertical distance between the private and social cost curves.

• A diagram should only show the marginal private cost curve, as external costs are not relevant in marginal analysis.

• A diagram should illustrate only the marginal social cost curve, ignoring both private and external costs.

• A diagram should show marginal benefit and average cost curves, with no reference to external costs.

Use a diagram to illustrate the distinction between market equilibrium and social optimum position in the context of external costs.

• The diagram should show the market equilibrium where marginal private cost equals marginal benefit, and the social optimum where marginal social cost equals marginal benefit.

• The diagram should show the market equilibrium where marginal social cost equals marginal benefit, and the social optimum where marginal private cost equals marginal benefit.

• The diagram should show both market equilibrium and social optimum at the same point where marginal private cost equals marginal social cost.

• The diagram should only show the market equilibrium where marginal private cost equals marginal benefit, ignoring social optimum.

Use a diagram to illustrate the identification of welfare loss area due to external costs.

• The welfare loss area is shown as the triangle between the marginal social cost and marginal benefit curves, from the market equilibrium to the social optimum.

• The welfare loss area is shown as the rectangle between the marginal private cost and marginal benefit curves, from the market equilibrium to the social optimum.

• The welfare loss area is shown as the area under the marginal benefit curve only, from the origin to the market equilibrium.

• The welfare loss area is shown as the area above the marginal social cost curve, from the social optimum to the market equilibrium.

Use a diagram to illustrate the external benefits of consumption using marginal analysis.

• A diagram should show marginal private benefit, marginal external benefit, and marginal social benefit curves, with the external benefit represented as the vertical distance between the private and social benefit curves.

• A diagram should only show the marginal private benefit curve, as external benefits are not relevant in marginal analysis.

• A diagram should illustrate only the marginal cost and marginal benefit curves, ignoring any externalities.

• A diagram should show the marginal social cost and marginal private cost curves, with the external benefit as the horizontal distance between them.

Use a diagram to illustrate the distinction between market equilibrium and social optimum position in the context of external benefits.

• The diagram should show the market equilibrium where marginal private benefit equals marginal cost, and the social optimum where marginal social benefit equals marginal cost.

• The diagram should show the market equilibrium where marginal social benefit equals marginal cost, and the social optimum where marginal private benefit equals marginal cost.

• The diagram should show both market equilibrium and social optimum at the same point where marginal private benefit equals marginal social benefit.

• The diagram should only show the market equilibrium where marginal cost equals marginal revenue, ignoring social optimum.

Use a diagram to illustrate the identification of welfare gain area due to external benefits.

• The welfare gain area is shown as the triangle between the marginal social benefit and marginal cost curves, from the market equilibrium to the social optimum.

• The welfare gain area is shown as the rectangle below the marginal cost curve and above the demand curve.

• The welfare gain area is shown as the area between the supply and demand curves at the market equilibrium only.

• The welfare gain area is shown as the area above the marginal social benefit curve and below the price line.

What is the impact on economic agents of externalities and government intervention in various markets?

• Externalities can lead to market failure, and government intervention can help correct these failures through taxes, subsidies, regulation, or provision of public goods.

• Externalities always result in efficient market outcomes, and government intervention is unnecessary.

• Government intervention in markets always leads to inefficiency and worsens externalities.

• Externalities have no impact on economic agents, and markets self-correct without any intervention.

What is the distinction between public and private goods using the concepts of non-rivalry and non-excludability?

• Public goods are non-rivalrous and non-excludable, while private goods are rivalrous and excludable.

• Public goods are rivalrous and excludable, while private goods are non-rivalrous and non-excludable.

• Public goods are excludable but non-rivalrous, while private goods are non-excludable and rivalrous.

• Public goods are rivalrous and non-excludable, while private goods are non-rivalrous and excludable.