1.3 Market failure

Question 1

Define market failure

Answer 1

Market failure is where the free market mechanism fails to allocate resources efficiently and therefore social welfare maximisation.

Question 2

Define non- rival

Answer 2

my consumption of a good doesnt affect the consumption for others

Question 3

Define non- excludable

Answer 3

Once provided, its difficult to stop non- payers from using it, which leads to the free rider problem

Question 4

include characteristics

Examples of quasi- public goods

Answer 4

semi-non- rival: up to a point, beaches become crowded as do parks/ leisure activities. Open- access Wifi networks become crowded
semi- non- excludable: It is possible but difficult or costly to exclde non-payers consumers e.g. fencing a park or beach and charging a entrance fee

Question 5

Free- rider problem

Answer 5

• Becuase public goods are non-excludable it is difficult to charge people for benefitting once a product is available
• Given firms are profit maximisers, pure public G/S are not normally provided by the private sector as they would be unable to supply them for a profit
• The free- rider problem leads to under- provision of a good and thus causes market failure

Question 6

Which economic agent provided public goods to economy

Answer 6

• Govt decides what output of public goods/ funding of public goods is appropriate for society
• To do this, it must estimate the net social benefits from making public goods available
• Using cost- benefit analysis

Question 7

Define assymetric infomation

Answer 7

• Producers know more than consumers
• Imperfect infomation

Question 8

Optimising our own self interest

Tragedy of the commons

Answer 8

The pursuit of individual self interest is often not good for social efficiency, which leads to long term depletion of resources

Question 9

Define adverse selection

Answer 9

• Adverse selection occurs when information asymmetry leads to the selection of unfavorable or risky choices.
• In markets with imperfect information, buyers may be more likely to purchase lower-quality or riskier goods or services because they cannot differentiate between high and low quality.

Question 10

Give an example of adverse selection

Answer 10

Example of Adverse Selection: In the health insurance market, if insurers cannot accurately assess an individual’s health status, they may attract more high-risk policyholders, leading to higher premiums and potentially driving healthier individuals away

Question 11

How might infomation gaps lead to food waste

Answer 11

• Food suppliers lack market info eg predicting size of harvests - dependent on climate, pest control, disease/ time lags in growing crops
• Supermarkets lack market info, eg, predicting household demand- depends on tastes and fashion which might change/ impact competitors
• Consumers lack market info eg uncertainity over how to store food or whether food is fit for consumption after sell-by-dates

Question 12

Define private benefit

Answer 12

Private benefits refer to the benefits received by producers or consumers directly involved in an economic transaction

Question 13

Define external benefit

Answer 13

External benefits are benefits received by third parties who are not part of the economic transaction.

Question 14

Define social benefit

Answer 14

Social benefits represent the total benefits of an economic activity, including both private benefits and external benefits.