6. Market Failure

Question 1

What is a market failure?

Answer 1

A situation where market forces lead to sub-optimal allocation of resources.

Question 2

Define externalities.

Answer 2

A positive or negative impact of a transaction on people who are external to that transaction.

Question 3

A free market results in the ………consumption of merit goods and ……consumption of demerit goods.

Answer 3

1. Under

2. Over

Question 4

What are the two defining characteristics of public good?

Answer 4

1. Non-diminishability: The good or service can serve a small or large number of people at exactly the same cost.
2. Non-exclusivity: Providers of the good cannot exclude non-payers which makes it unlikely it will be provided by profit-seeking providers.

Question 5

What is a indirect tax?

Answer 5

A tax levied on spending.