The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

Which is the most efficient Economic System for allocating resources? The Market Economy because Economic agents both act in self- interest:

Firms try to maximize rofit by gi!ing consumers exactly "hat they "ant# $t is assume% that there are numerous firms an% so this le!el of com etition forces firms to be efficient#

&ousehol%s try to maximize satisfaction# This results in no "astage#

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

What is meant by the term market failure? When the market economy fails to allocate resources efficiently#

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

Externalities ' cost or benefit of either ro%uction or consum tion( "hich has s ill-o!er effects that affect a thir% arty( not ai% by the ro%ucer or consumer# So there is a %i!ergence bet"een the social an% the ri!ate cost or benefit#

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

)ri!ate costs *osts %irectly incurre% by consumers an% ro%ucers "hen they engage in economic acti!ity#

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

External costs The %ifference bet"een ri!ate an% social costs( these are the costs ex erience% by a thir% arty not %irectly in!ol!e% in the economic acti!ity#

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

Merit goo%s

' goo% consi%ere% to be socially beneficial# $t usually has external benefits

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

+emerit goo%s

' goo% consi%ere% to be socially harmful# $t usually has external costs

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

Market base% instruments +e!ices aime% at buil%ing the full effects into the market rice so that the rice mechanism can be use% to allocate resources efficiently because the re!ise% rice reflects the full costs# This is calle% internalising the externality#

EBEA | 2008 |

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

)ro erty rights )ri!ate o"nershi of scarce resources( "hich gi!es the legal entitlement to use an% sell ro erty an% the right to sue for com ensation#

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

)ublic goo%

's o ose% to a ri!ate goo%# $t has non exclu%ability ,"hich means that if it is ro%uce% no one can be exclu%e% from its use- an%non ri!alry ,one erson benefiting %oesn.t re%uce the amount a!ailable for others-

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The Economics & Business Education Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business Studies and Enterprise

/o!ernment failure

When go!ernment inter!ention to correct market failure lea%s to a net loss in economic "elfare# $n other "or%s they make it "orse than the market failure to begin "ith# .

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