1.3 market failure

Question 1

what is market failure?

Answer 1

refers to the failure of the market system to allocate resources efficiently.

Question 2

why does market failure arise?

Answer 2

the price mechanism has not taken into account all the costs and/or benefits in the production or consumption of the product or service

Question 3

why my market failure occur?

Answer 3

externalities, non-provision of public goods, information gaps, monopoly, moral hazard, immobility of labour, speculation and market bubbles

Question 4

why my market failure occur?

Answer 4

-for resources t be allocated efficiently, necessary for social marginal costs to be equal to equal to social marginal benefits
- some costs or benefits may not be included because they may not be known or may be difficult to quantify

Question 5

what does social marginal costs refer to?

Answer 5

the addition to total cost of producing a extra unit of output

Question 6

what does social marginal benefit refer to?

Answer 6

the addition of total benefits of consuming an extra unit

Question 7

what is the definition of public goods?

Answer 7

good which possesses the characteristics of non-rivalry and non-excludability

Question 8

what are some examples of public goods?

Answer 8

street lighting, lighthouses, roads

Question 9

what is a positive externality?

Answer 9

benefit that is enjoyed by a third-party as a result of an economic transaction

Question 10

what are examples of positive externalities?

Answer 10

schools, hospitals or flu jabs

Question 11

what is a negative externality?

Answer 11

cost that is suffered by a third party as a result of an economic transaction

Question 12

what is an example of a negative externality?

Answer 12

alcohol, drugs, cigarettes or coal-fired power stations

Question 13

what is the definition of an information gap?

Answer 13

when there is a lack of information or asymmetric information in a market

Question 14

what are examples of information gaps?

Answer 14

pensions, housing, financial services

Question 15

what is the meaning of externalities?

Answer 15

costs or benefits to third parties who are not directly part of a transaction between producers or consumers

Question 16

why is an externality a form of market failure?

Answer 16

market forces will not result in an efficient allocation of resources

Question 17

what is a private cost?

Answer 17

costs paid directly by the producer and consumer in a transaction

Question 18

what is a social cost?

Answer 18

sum or private costs and external costs

Question 19

what does non-rival mean?

Answer 19

consumption of one good or service by one person does not does not restrict consumption of other people

Question 20

what does non-excludability mean?

Answer 20

benefits from a good or service cannot be confined solely to people who paid for it

Question 21

why is advertising an information gap?

Answer 21

some advertising is informative, some is persuasive

Question 22

what is the free-rider problem?

Answer 22

characteristics of a public good, when it is provided by someone, other people will benefit from it without paying

Question 23

why is the free-rider problem a problem?

Answer 23

such circumstances, the market will fail, insufficient number of people will be willing to pay for the product, not be profitable for the business to provide it

Question 24

what is symmetric information?

Answer 24

both parties in a transaction will have the same information

Question 25

what is asymmetric information?

Answer 25

where one party of a transaction has more or superior information compared to another

Question 26

what are some examples of asymmetric information?

Answer 26

housing markets, life insurance, second-hand car sales, financial services, high-tech products

Question 27

what is a quasi public good?

Answer 27

some elements of a public good, could either have one characteristics, or elements of each characteristics

Question 28

why might public goods not be provided by the public sector?

Answer 28

non-excludability means that it is impossible to charge for using products, means it has to be provided for by the government