b) The meaning of market failure

Question 1

what is market failure

Answer 1

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

Question 2

what is a externality

Answer 2

An externality is the cost or benefit a third party receives from an economic
transaction outside of the market mechanism

Question 3

positive and negative externalities

Answer 3

Negative externalities are caused by the consumption of demerit goods, such as
cigarettes, and positive externalities are caused by the consumption of merit
goods, such as recycling schemes.

Question 4

Information gaps

Answer 4

It is assumed that consumers and producers have perfect information when
making economic decisions. However, this is rarely the case, and this
imperfect information leads to a misallocation of resources.

Question 5

The under-provision of public goods

Answer 5

Public goods are non-excludable and non-rival, and they are underprovided in
a free market because of the free-rider problem.

Question 6

Monopolies

Answer 6

Since the consumer has very little choice where to buy the goods and services
offered by a monopoly, they are often overcharged. This leads to the underconsumption of the good or service, and therefore there is a misallocation of
resources, since consumer needs and wants are not fully met

Question 7

Inequalities in the distribution of income and wealth

Answer 7

There is an unequitable distribution in income and wealth. Income refers to a
flow of money, whilst wealth refers to a stock of assets. This can lead to
negative externalities, such as social unrest.

Question 8

what is complete market failure

Answer 8

Complete market failure occurs when there is a missing market. The market does not supply the products at all.

Question 9

what is partial

Answer 9

Partial market failure occurs when the market produces a good, but it is the wrong
quantity or the wrong price. Resources are misallocated where there is partial
market failure.