1.3.1 types of market failure

Question 1

Define market failure?

Answer 1

market failure is defined as when the free market fails to allocate scarce resources at the socially optimum level of output.

Question 2

what is positive/negative externality?

Answer 2

This is either negative or positive impacts on third parties as a result of production or consumption

Question 3

What is the evaluation point for this externality?

Answer 3

since producers are profit maximizers and consumers are utility maximizers-they consider their private benefits.

Question 4

Explain de-merit goods or merit goods and why can this be considered as a market failure?

Answer 4

de-merit goods-junk,drugs and gambling
merit goods-education and healthcare
now these goods are either good or bad for consumers but some consumers may don’t know the magnitude of how bad or good it might be so they are not achieving the socially optimum level.

Question 5

what is the eval point for this?

Answer 5

now if there is information failure then consumers will make irrational choices and consume de-merit goods

Question 6

how can public goods be considered a market failure?

Answer 6

Public good- This is known as the free-rider problem i.e street lights all the passing drivers can benefit without having to pay for it. This means there will be a decline in the notion of supplying the public good

Question 7

How can monopoly power be considered as a market failure?

Answer 7

There’s only one dominant seller e.g