1.3.1 - Types of Market Failure

Question 1

Role of the market

Answer 1

. Allocate scarce resources

Question 2

Name the two variations of market failure

Answer 2

. Partial Market Failure
. Complete Market Failure

Question 3

Explain Partial Market Failure

Answer 3

. when markets lead to the overproduction or underproductions of goods

Question 4

Explain Complete Market Failure

Answer 4

. In rare instances, the market may not exists (known as missing markets), leading to no production of goods and services.

Question 5

Define missing market

Answer 5

. When markets do not exist

. A market where the market mechanism fails to supply any of good

Question 6

Define Market Failure

Answer 6

when the market fails to allocate scarce resources to the socially optimum level

Question 7

What is not maximised when their is market failure?

Answer 7

. Economic Welfare

. Social Welfare

Question 8

Define Externality

Answer 8

. The cost or benefit a third party receives from an economic transaction outside of the market mechanism

Question 9

Explain Under - provision of public Goods

Answer 9

. Public goods are goods that are both non - excludable and non - rival

. Examples include street lighting and defence

. A reason for under - provision of public goods is that you can easily gain benefits without paying for it. There is a large incentive for individuals not to pay for the good in the hope that someone else will pay for it.

. The result is that public goods are under - provided if left to free market forces.

Question 10

Explain Information Gaps

Answer 10

. Sometimes information is imperfect.

E.g. a consumer have have a lack of information when buying a washing machine in comparison to drinks, since washing machines are bought less frequently. This may result in wrong choices.

. Asymmetric information is when either the buyer or seller has more information than the other party.

E.g. A dentist may recommend treatments when in reality the patients are in pain. Since, the dentist has more information, the dentist may recommend a treatment to gain more capital

Question 11

Another example of Asymmetric information

Answer 11

. Owners of cars may have more information when selling the car. The seller may know that the car is faulty or unreliable, whilst the customer won’t. The customer is willing to pay more than he necessary. This leads to market failure.

. This is market failure

Question 12

Name the three parts of Market Failure

Answer 12

. Externalities
. Under - provision of market goods
. Information Gaps