1.3 - markets and market failure

Question 1

types of market failure

Answer 1

• externalities
• under-provision of public goods
• information gap

Question 2

externality market failure

Answer 2

externality is the cost or benefit a 3rd party receives from an economic transaction outside of the market mechanism
- leads to over or under-production of goods meaning resources aren’t allocated efficiently

Question 3

under provision of goods market failure

Answer 3

public goods are non-rivalry and non-excludable, meaning they are under provided by the private sector due to the free-rider problem
- market is unable to ensure enough of the goods are provided

Question 4

information gap market failure

Answer 4

firms are assumed to have perfect information on their costs and revenue curves and governments are assumed to know the full costs and benefits of each decision
- untrue in reality so economic agents do not make rational decisions and resources are not allocated to maximise welfare

Question 5

private costs/benefits

Answer 5

cost or benefit to the individual participating in the economic activity
- D curve = private benefits
- S curve = private costs

Question 6

social costs/benefits