6.1 Socially Efficient and Inefficient Market Outcomes

• What is social efficiency in economics?

  Maximizing total societal welfare
• Social efficiency occurs when resources are allocated to maximize the combined consumer surplus and producer surplus.
• Social inefficiency arises when resources are optimally allocated, leading to increased societal welfare.

  False
• When does social efficiency occur in terms of marginal social benefit (MSB) and marginal social cost (MSC)?

  MSB equals MSC
• The concept of social efficiency considers externalities that affect society as a whole.
• What are the main causes of market failure?

  Externalities, public goods, asymmetric information, monopoly power
• A factory's pollution, which harms nearby residents, is an example of a negative externality.
• Microsoft's dominance in operating systems is an example of monopoly power causing market failure.
• What are the sources of market inefficiency?

  Externalities, public goods, asymmetric information, monopoly power
• Market failure occurs when the free market fails to allocate resources efficiently.
• Public goods are excludable and rival, leading to efficient allocation by the market.

  False
• What are the main methods of government intervention to address market failures?

  Regulations, taxes, subsidies, direct provision, public ownership
• Taxing carbon emissions is an example of using taxes to address negative externalities.
• Direct provision by the government ensures access to essential services but may be less efficient than private provision.
• What is the primary goal of government policies in addressing market failures?

  Correct inefficiencies
• The government uses regulation to address externalities and monopoly power.
• Taxation and subsidies can be used to internalize externalities.
• What type of goods does the government provide to ensure adequate supply?

  Public goods
• The government provides information to mitigate asymmetric information.
• Match the government intervention method with its purpose:

  Regulation ↔️ Correct externalities and monopoly power

  Taxation/Subsidies ↔️ Internalize externalities

  Public Goods Provision ↔️ Ensure supply of non-excludable goods

  Information Provision ↔️ Reduce asymmetric information
• Emission standards for factories are an example of government regulation.
• A carbon tax is an example of government taxation to internalize a negative externality.
• What is an example of the government providing a public good?

  Funding national defense
• Imposing a carbon tax shifts the market towards social efficiency.
• Social inefficiency occurs when market outcomes fail to maximize total social welfare.
• What are externalities in market transactions?

  Costs or benefits to third parties
• Positive externalities lead to the underproduction of goods.
• What is the purpose of a carbon tax imposed by the government?

  Reduce pollution
• Social inefficiency occurs when market outcomes fail to maximize total social welfare
• When negative externalities exist, firms tend to underproduce goods because they bear the full social costs.

  False
• What is an example of a negative externality?

  Factory polluting a river
• What is an example of a positive externality?

  Individual getting vaccinated
• Social efficiency is achieved when resources are allocated to maximize the combined consumer and producer surplus
• What two conditions must be equal for social efficiency to be achieved?

  MSB and MSC
• Social efficiency builds upon economic efficiency by considering externalities.
• Market failure occurs when the free market fails to allocate resources efficiently
• What is an example of a market failure caused by externalities?

  Pollution from a factory
• What is a characteristic of public goods that leads to underproduction in the market?

  Non-excludable and non-rival
• What type of market failure arises from asymmetric information?

  Used car sales
• Monopoly power can lead to higher prices and lower output