1.3) market failure

Question 1

What is market failure?

Answer 1

• when the price mechanism fails to allocate scarce resources efficiently and consumers suffers as a result

Question 2

What is an externality?

Answer 2

• the effect that producing or consuming a good or service on people that aren’t involved in the economic transaction - the ‘third parties’
• positive externalities are the external benefits and negative externalities are the external costs to a third party
• can occur in production and consumption

Question 3

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