Question

Complete each of the following sentences: a. When the private operation of a market leads to overproduction or underproduction of some good, this is known as a(n) Goods that are non-rival and non-excludable are known as b. c. are cash or in-kind benefits given to individuals as outright grants from the government. A(n) directly involved in a market transaction. d. confers an external benefit on third parties that are not refers to the government's pursuit of full employment e. and price stability through variations in taxes and government spending.

Answer 1

a. When the private operation of a market leads to overproduction or underproduction of some good, this is known as a market failure. Market failure refers to the failure of allocation of resources effectively in a free market due to breakdown of price mechanism. When the net social welfare is ignored overall due to the irrational thinking of individuals for their self- interests, market failure occurs. Existence of monopoly in the market where production of goods are fewer but prices are higher, prevalance of negative externalities like over consumption etc are the main factors for market failure.

b. Goods that are non-rival and non-excludable are known as public good.

   The goods and services whose consumption by one individual does not affect the utility of others are knoen as public goods. Public goods are non rival means the constant consumption of these goods do not reduce its availability to others. For eg, public libraries and health services provided by government are to be used by everyone without any rivalry. Non excludable means the benefits of public goods can not be confined to the payers only.

c. Transfer Payments are cash or in-kind benefits given to individuals as outright grants from the government.

When governments makes one way payments to the public through social security or public welfare system to redistribute income and wealth, it is called as transfer payments. Pensions, old age securities, students grants, unemployment benefits etc are the forms of transfer payments.  

d. A positive externality confers an external benefit on third parties that are not directly involved in a market transaction.

When consumption and production of a good provides benefits to the third party in a greater way without making any payment, it is called as positive externality. Education provides greater knowledge and skills to individuals but it also affects the society in a positive way for the welfare of a community which could be called as positive externality of education.

e. Fiscal policy refers to the government's pursuit of full employment and price stability through variations in taxes and government spending.

Fiscal policy is implemented by government to influence the economy by adjusting its spendings and tax rates.