1.3.1 - Types Of Market Failure

Question 1

When Does Market Failure Occur?

Answer 1

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

Question 2

What Are The Causes Of Market Failure?
(5 Points)

Answer 2

~ Negative and positive externalities.

~ De-merit and merit goods.

~ Public goods.

~ Income inequality.

~ Monopoly power.

Question 3

Describe ‘Negative & Positive Externalities’ As A Cause Of Market Failure
(4 Points)

Answer 3

~ Won’t be accounted for in the free market mechanism.

~ Consumers ignore impacts on 3rd parties when they consume, as they maximise utility only considering their PB.

~ Firms ignore impacts on 3rd parties when they produce, as they maximise profit only considering their PC.

~ Both of them focus on their self interest.

Question 4

Describe ‘De-Merit & Merit Goods’ As A Cause Of Market Failure
(3 Points)

Answer 4

~ De-merit goods are worse for us.

~ Merit goods are better for us.

~ There is information failure, as to what is good or bad for us, leading to consumers making irrational decisions when they consume.

Question 5

Describe ‘Public Goods’ As A Cause Of Market Failure
(2 Points)

Answer 5

~ Free rider problem.

~ Firms are profit motivated, meaning there might not be any supply at the end.

Question 6

Describe ‘Monopoly Power’ As A Cause Of Market Failure
(3 Points)

Answer 6

~ One dominant seller.

~ High barriers to entry / exit.

~ Exploited consumers.