Loading subjects
Market failure and government intervention · Part 1 of 2
6 exam-style questions with model answers, plus 8 quick multi-choice questions — every question on this part of the standard, grouped by the 2 pages of notes they come from.
Write a full answer before you reveal the model one. That comparison is where the learning happens.
Explain the difference between a private cost and a social cost, and state what this means for where a free market produces.
Using the SMB/SMC model, explain in detail why a negative production externality causes a market to fail on efficiency, and identify the welfare loss.
Explain why a market outcome can be allocatively efficient and still be judged a market failure. Use models to support your answer, and discuss what this means for how a government should assess an intervention.
A factory's production process creates air pollution affecting nearby residents.
Identify the type of externality, state which curve diverges, and state whether the good is over- or under-provided.
Using the SMB/SMC model, explain in detail why a positive consumption externality leads to a market failure, and identify the welfare loss.
Compare a negative production externality and a positive consumption externality using the SMB/SMC model, and discuss why the same government tool cannot fix both.