1-3 Market failure

Question 1

What is market failure?

Answer 1

• Market failure occurs when the free market fails to allocate resources to the best interests of society, so there is an inefficient allocation of scarce resources.

Question 2

What are the types of market failure?

Answer 2

• Externalities.
• The under-provision of public goods.
• Information gaps.

Question 3

What is an externality?

Answer 3

• The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
• Can be positive or negative.

Question 4

What are private costs?

Answer 4

• The costs to economic agents involved directly in an economic transaction.

Question 5

What are social costs?

Answer 5

• Private costs plus external costs.
• The cost to society as a whole.

Question 6

What is a private benefit?

Answer 6

• Consumers private benefit is the benefit derived from the good.
• Firms private benefit is the revenue from selling the good.

Question 7

What is a social benefit?

Answer 7

• Private benefits plus external benefits.

Question 8

What are the government policy’s for negative externalities?

Answer 8

• Indirect taxes
• Subsidies
• Regulation
• Provide the good directly
• Provide information
• Property rights
• Personal carbon allowances

Question 9

Why are public goods non-excludable?

Answer 9

• By consuming the good one does not prevent another from consuming the good.

Question 10

Why are public goods non-rival?

Answer 10

• The benefit other people get from the good does not diminish if more people consume the good.

Question 11

What is the free-rider problem?

Answer 11

• People who don’t pay for the good still see the benefits from the good. It is difficult to make a profit, so they are not found in the private sector.

Question 12

Why are public goods under-provided?

Answer 12

• Hard to make profitable
• Difficult to measure the value and put a price on a public good.

Question 13

What are quasi-public goods?

Answer 13

• Partially provided by the free market.

Question 14

What is symmetric information?

Answer 14

• Consumers and producers have perfect market information to make their decision.
• Leads to an efficient allocation of resources.

Question 15

What is asymmetric information?

Answer 15

• Unequal knowledge between consumers and producers.
• Leads to an inefficient allocation of resources which in turn leads to market failure.