F581 Markets in Action : Revision page 55

Chapter 3: Market failure and government intervention

You need to learn about ....:
INEFFICIENCY
Aim 1 : explain what is meant by market failure in terms of inefficient use of scarce
resources
1. Define market failure
2. Define economic efficiency
3. Define allocative efficiency (p54) and productive efficiency
4. Draw a PPF and explain why a point on the PPF is efficient and at what point it is
inefficient ( clue : inside the PPF)
INFORMATION FAILURE
Aim 2 : Explain what is meant by information failure and analyse its implications
5. Define information failure
6. Why is information failure really important in considering market failure ?
7. What is assymmetric information ?...give three examples where the market fails due to
asymmetric information failure.( page 58)

EXTERNALITIES ( p 58)
8. Define an externality ( use words ...spillover effect and third party....)
9. Give TWO examples of spillover effects on third parties
10. What is a PRIVATE cost or benefit ?
11. What is an EXTERNAL COST or BENEFIT ?
12. What therefore is a SOCIAL cost or SOCIAL benefit ? Why are external costs different
from social costs ????
EXTRAS
a) List all the private costs of a university education then ....List the private benefits of
a university education ( go to p 70 for more info...)
b) List the social costs of the state /government providing university education subsidies
then list some social benefits ( remember to third parties/spillover effects) of state
university eductaion provision

NEGATIVE EXTERNALITIES
Aim 3 : Explain what is meant by negative externalities and how they arise as a result
of the divergence between private and social costs
Aim 4: Explain how negative externalities lead to market failure
13. Define negative externality
14. What are the FOUR negative externalities discussed on p60...can you name any others
which we have studied
15. Draw a diagram to show why a negative externality causes overproduction ie too many
scarce resources used for its production ( fig 3.1 on p61) Label the private and social cost
lines.....
16. Do the Activities on page 61
17. Explain again how negative externalities cause the market to fail.....

POSITIVE EXTERNALITIES
Aim 5: Explain what is meant by positive externalities and how they arise as a result
of the divergence between private and social costs
Aim 6 : Explain how positive externalities lead to market failure
18. Define positive externality
19. What are the THREE negative externalities discussed on p62 and explain the third
party/spillover benefits...can you name any others which we have studied
20. Draw a diagram to show why a positive externality causes under production and so market
failure ie too few scarce resources used for its production ( fig 3.2 on p62) Label the
private and social benefit lines.....
21. Do the Activities on page 62

MERIT and DEMERIT GOODS

Aim 7: Explain what is meant by merit and demerit goods
Aim 8 :Explain why over-consumption of demerit goods and under consumption of
merit goods leads to market failure
22. Define (i) a merit good (ii) a demerit good
23. How is market failure caused by merit/dermerit goods basically an example of information
failure /
24. Why do some people say that the government should not intervent to correct some aspects
of market failure linked to merit and demerit goods ? ( what sort of economics is that
involved in making value judgements ??)
25. Learn the paragraph at the top of column 2 on page 63 !!!
26. Learn the sections/discussion in case you get an essay on these topics (p63/64) on....
Free provision of (i) education (ii) health provision NHS
Smoking
Alcohol consumption
Chewing gum

PUBLIC GOODS (p64)

Aim 9: Explain the characteristics of public goods
Aim 10 : Explain why public goods cause market failure
27. Define a public good
28. Define a private good
29. Why would public goods not be provided in a free market by the private sector ?
30. What does non-excludable mean ?
31. What does non rivalry mean ?
32. Explain what a quasi public good is
33. Why are certain stretches of roads not public goods but quasi public ?
34. Why are pure public goods rare ? ...do activity p 66

This last section is important ...learn carefully ( possible

essays.... page 67 onwards....
GOVERNMENT INTERVENTION TO CORRECT MARKET
FAILURE
Aim 9: Explain why governments intervene to correct externalities to influence the
efficient allocation of merit/demerit goods and to fund public goods
35. Make a list of all the different examples given of how governments intervene to
correct market failures?
36. Identify the TWO different approaches the government can use
37. Use your list to classify the different ways
38. What happens if the government fails ???
Aim 10 : Evaluate the direct impact of
TAXATION
SUBSIDIES
REGULATIONS
TRADABLE POLLUTION PERMITS
INFORMATION
to correct market failure
Aim 11: Discuss the EFFECTIVENESS of these policies in correcting market failure
1. TAXATION (used to internalise a negative externality and over production)
39. Define taxation
40. What are the two main types of taxation ( fiscal measures)
39. How is income tax used to correct market failure
40. Is taxation a leakage or injection to the ciriicular flow ?
41. Which is the largest user of government expenditure ?
42. How is indirect taxes sometimes used ?
43. Who pays the tax to correct negative externalities...but who really pays ...... ???
44. Draw a diagram to show how a tax is used to internalise a negative externality
(IMPORTANT !!!)
45. Use fig 3.6 and LEARN a paragraph to explain how it works from p 68
46. Comment on why taxation may NOT always be effective (IMPORTANT !!!) learn 4 or
5 reasons for an essay on taxation)
47. What is APD and how is it intended to correct negative externalities linked to
flying...what are some of the problems with APD ? ( read Economics in Context p69)
REMEMBER THE AIM ...To discuss the effectiveness of taxation policy
(ESSAY !!!...learn diagram ...benefits and drawbacks for an essay)
2. SUBSIDIES (used to internalise a positive externality and underproduction
48. Define a subsidy
49. Why is a subsidy used ?
50. Give examples of subsidies given by governments

51. Draw a diagram to show how a subsidy is used to internalise a positive externality and
EXPLAIN your diagram (ie how it corrects the fact that too fee scarce resources are used to
correct the externality)
52. Why do some critics say that the current system of university education is incorrec t and
MORE government subsidies need to be given ? ( Learn this ...a potential essay question
this year ?
53. Why should rural bus services be subsidied?
54. Make a list of disadvantages/problems of using subsidies to correct market failure

REMEMBER THE FINAL AIM ...To discuss the effectiveness of subsidisation

(ESSAY !!!...learn diagram ...benefits and drawbacks for an essay)
REGULATIONS, STANDARDS and LEGAL CONTROLS
55. How is this approach different from the previous two methods ?
56. Give an example of legislation (the law) used to correct negative externalities in the
environment
57. How does the compulsory wearing of seat belts correct market failure ?
58. How does professional standard requirements for workers prevent market failure
59. What laws ( regulations) exist on the sale of certain goods
60. Why is it not easy to correct market failures by using standards and regulations
61. How can environmental standards which have been set by the law not always help ?

REMEMBER THE FINAL AIM ...To discuss the effectiveness of regulations etc
(ESSAY !!!...learn...benefits and drawbacks for an essay
TRADABLE POLLUTION PERMITS
62. Explain how a tradable permit works ?
63. Why is this a market based approach ?

64. Draw diagram p72 and explain

65. Why is this an effective policy for pollution as used by the European Trading Scheme
?
66. Why might the startegy fail ?
67. (Note : there is a video clip on this on Fronter)
REMEMBER THE FINAL AIM ...To discuss the effectiveness of TRADABLE
PERMITS (ESSAY !!!...learn diagram ...benefits and drawbacks for an essay
GOVERNMENT INFORMATION PROVISION
68. How and why does the government provide information ?
69. Why is a combination of methods often most effective ?
70. Give an example of where the government might use all three tactics ( taxation, regulation
and information provision) to correct the market failure