Theme 2 RST

Question 1

Market failure

Answer 1

• when the price mechanism fails to allocate scarce resources efficiently.

Or

When the operation of market forces lead to a net social welfare loss

Question 2

Public goods 3 characteristics

Answer 2

• Non excludability- the benefits derived from the good cannot be confined solely to those who paid for it
• non-rival consumption- consumption by one consumer does not restrict consumption by other consumers
• non-rejectable- the collective supply of a public good for all cannot be rejected by the people

Question 3

Free rider problem

Answer 3

Where people benefit from the provision of good/service without having to pay for it

To overcome this problem the government pays for this good/service through taxation overtime

Question 4

Merit good

Answer 4

Are those goods and services considered to be under consumed

• Consumption of merit good generates positive externalities
• Whereby the social benefit from consumption exceeds the private benefit

Question 5

Merit good examples

Answer 5

Healthcare

Education

Question 6

Demerit goods

Answer 6

• thought to be bad for you

- is where consumption leads to negative externalities

Question 7

Asymmetric information

Answer 7

• this type of market failure exists when one individual or party has much more information than another individual or party

Question 8

Information gaps

Answer 8

Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision

Question 9

Government intervention aimed at closing the information gap

Answer 9

• compulsory labelling on cigarettes with health warnings to reduce smoking
• improved nutritional information on foods