1.3.1 Types of market failure

Question 1

Define market failure

Answer 1

This is when the price mechanism misallocates resources leading to allocative inefficieny.
This casues market failure as the price mechasnim has created a new market price and output level which ,however, is not the most benefical for society’s welfare.

Question 2

List the types of market failure

Answer 2

1) Externalities
2) under-provision of public goods
3) information gaps