Market Failure Fundamental Vocabulary and Concepts Market Failure Merit Goods Demerit Goods Public Goods Non-Excludable Good Non-Rivalrous Good Marginal Private Benefits (MPB) Marginal Social Benefits (MSB) Marginal Private Costs (MPC) Marginal Social Costs (MSC) Types of Market Failure 1. Lack of public goods 2. Undersupply of merit goods 3. Oversupply of demerit goods 4. The existence of externalities
Positive Externalities Negative Externalities Negative Externalities of Production Negative Externalities of Consumption Positive Externalities of Production Positive Externalities of Consumption Internalizing External Costs Tradable Permits Cap and Trade Programs Common Access Resources Sustainability Welfare Loss Socially Efficient Output
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Market Failure Review Questions: What you should be able to do!
Using a diagram explain the concept of positive externalities of production. Explain that merit goods are goods whose consumption creates external benefits.
Define market failure. Explain and give examples of merit goods. Explain and give examples of demerit goods. Explain and give examples of public goods Define positive and negative externalities of production and consumption. Explain the concept of market failure as a failure of the market to achieve allocative efficiency resulting in an over-allocation of resources or an underallocation of resources Explain the concepts of marginal private benefits (MPB).
Using a diagram, evaluate the use of government policy responses to solve the problem of positive externalities of production and consumption. Define common access resources. Define sustainability. Explain the threat to sustainability posed by the use of fossil fuels in developed countries. Explain the threat to sustainability posed over-exploitation of agricultural land in developing countries. Evaluate, using diagrams, possible government responses to threats to sustainability.
Explain the concepts of marginal social benefits (MSB). Explain the concepts of marginal private costs (MPC). Explain the concepts of and marginal social costs (MSC).
Adopted from the IB Economics Subject Guide
Describe the meaning of externalities as the failure of the market to achieve a social optimum equilibrium (where MSB = MSC). Using a diagram explain the concept of negative externalities of production. Using a diagram explain the concept of negative externalities of consumption. Explain that demerit goods are goods whose consumption creates external costs. Using a diagram, evaluate the use of government policy responses to solve the problem of negative externalities of production and consumption. Using a diagram explain the concept of positive externalities of consumption.
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Market Failure IB Exam Practice Questions
5. (a.) Using the appropriate diagram, discuss how the consumption of gasoline qualifies as a negative externality. (b.) Evaluate the effectiveness of an indirect tax in solving this market
Paper 1: Essay Questions
failure.
1. (a.) Using the appropriate diagram, explain why the consumption of cigarettes is a market failure. (b.) Evaluate the use of government policies to reduce this market failure.
2. (a.) Using the appropriate diagram, explain why the impact of emissions from a paint factory are a market failure. (b.) Discuss the best policy a government may implement to minimize this negative externality of production.
3. (a.) Using the appropriate diagram, explain how the consumption of education provides positive outcomes for society. (b.) Evaluate the possible government policies that can be implemented to correct a positive externality of consumption
4. (a.) Explain how merit goods and public goods qualify as market failures. (b.) Discuss the impact of government policies to promote these goods.
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