1.3. Market Failure

Question 1

What is Market Failure and Causes

Answer 1

When the free market fails to allocate scarce resources at the socially optimum leval of output.

Failure and cause
1. Negative Externalities I-> Self - Interest
2. Posotive externalities I
3. De-Merit Goods I-> Information Failure
4. Merit Goods I
5. Public Goods ]-> Free Rider Problem & Profit Motivated Firms
6. Common Access Recources ]-> Self - Interest
7. Income Inequality ]-> Inequity
8. Monopoly Power ]-> one dominant seller & higher barriers to entry
9. Factor Immobility

Question 2

Merit / De-Merit Goods

Answer 2

Merit Goods - Deemed more benificial to consumers than they realise.
De-Merit Goods - Deemed more harmful to consumers than they realise.

Question 3

Negative / Posotive Externalities

Answer 3

NE in production / consumption
Cost to 3rd parties as a result of actions of producers / Consumers

PE in production / consumption
Benifits to 3rd parties as a result of actions of producers / Consumers

Question 4

Allocative Efficiency
equations

Answer 4

Private Cost (PC) - Producer’s Costs of Producton
S=MPC=MSC
Social Cost (SC) = PC + EC
Social Cost (SC) = Private Costs + External Costs

Private Benefits (PB) - Individual consumer benifits upon consumption
D=MPB=MSB
Social Benifits (SB) = PB + EB
Social Benifits (SB) = Private Benifit + External Benifit

Question 5

Public goods

Answer 5

Non - Excludable - No price can be charged for the good

Non - Rival - The quantity of a good doesn’t diminish upon consumption

Question 6

Common Access Resources

Answer 6

Natural resources over which no private ownership has been established

=> Lack of private ownership leads to the tragedy of the commons
Self Intrest & Resource Depletion

example. Forest , Sea , Air