Topic 2

Question 1

A bad equilibrium

Answer 1

When the market settles at a price and quantity where it would be possible to make some people better off without making anyone else worse off

Question 2

Lost total welfare due to companies and consumers are out of the market

Answer 2

Deadweight loss

Question 3

A good equilibrium

Answer 3

When the market settles at a price and quantity where it would be impossible to make some people better off without making anyone else worse off

Question 4

Welfare

Answer 4

• CS+PS
• Consumer Surplus + Producer Surplus

Question 5

Reasons for Market Failures

Answer 5

• Market power: When barriers to entry prevent firms from entering
  the market
• Information Problems: may prevent market existing altogether * public (regulation, labelling) and private (reputational, self-interest) policies can aid this
• Externalities: when actions of one party affect costs or benefits of another party (e.g. pollution on local property)
• Public Goods: goods that cannot be feasibly charged for the in the market
  (e.g. street lights, national defence)
• Merit goods: as a matter of social policy, we decide that people should be entitles to a good (e.g. heath, education)

Question 6

Private Cost

Answer 6

Cost to firm

Question 7

Social Cost

Answer 7

Cost to firm plus cost to society