1.3.1 Types of market failure

Question 1

Market failure

Answer 1

-Misallocation of resources in free market results in and inefficient or socially undesirable outcome
-Fails to achieve optimal allocation of g+s
-Outcomes do not align with societal welfare
-Often over/under productions

Question 2

Types of market failure
Externalities

Answer 2

Externalities:
-Unintended spill over effects of producing or consuming a good, which is received by third parties
-Either benefits or costs

Question 3

Types of market failure
Under provision of public goods

Answer 3

Under-provision of public goods:
-Non-excludable and non-rivalrous
-Individuals can benefit without paying so these goods tend to be underprovided by the private market

Question 4

Types of market failure
Information gaps

Answer 4

Information gaps:
-One party in an economic transaction has more or better information than the other party
-Lead to adverse selection and moral hazard