1.3.1 - Types of Market Failure

Question 1

What is market failure?

Answer 1

When the market fails to allocate scarce resources effectively.

Question 2

What are the 3 types of market failure?

Answer 2

• Externalities
• Under - provision of public goods
• Infomation gaps

Question 3

What is an externality?

Answer 3

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

Question 4

What is Under - Provision of public goods?

Answer 4

Public goods are non rivalrous and non excludable meaning they are under provided by the private sector due to the free rider problem.

Question 5

What is the free rider problem?

Answer 5

The free rider problem occurs when individuals benefit from a resource, service, or public good without contributing to its cost, leading to underproduction or overuse.

Question 6

What are infomation gaps?

Answer 6

Consumers do not always make rational decisions and so resources aren’t always allocated efficiently. This is because they don’t have perfect infomation.