Categories of Market Failure

Question 1

Market Power

Answer 1

Because the Invisible Hand Theory works best when the markets are competitive and firms are competing for the highest/lowest cost, a monopoly a monpsony and oligopoly(the largest providers of that service agreeing not to compete) would not drive the demand or supply higher or lower which wouldn’t move the equilibrium in a way that is beneficial for buyers.

Question 2

Equity

Answer 2

The market doesn’t account for fairness, so all equity must be enforced by government intervention. This is done through price ceilings and floors to limit how much and how little firms charge or give for a product or service.

Question 3

Public Goods

Answer 3

The free rider issue is the lack of excludability from the good or service. Although there is one firm that covers the cost of the product, anyone can use it usually without cost, which eliminates the possibility of generating profit from this type of good.

Question 4

Negative Externalities

Answer 4

A transaction that imposes cost on a third party. The buyer and seller are usually blind to this.

Question 5

Private Good

Answer 5

You can deny my access to the good and your consumption limits my consumption

Question 6

Common Good

Answer 6

You cannot deny my access to the good, but your consumption does limit my consumption (clean air and clean water)

Question 7

Club good

Answer 7

You can deny me access to the good, but your consumption does not limit my consumption (country clubs)

Question 8

Public good

Answer 8

You cannot deny me access and your consumption does not limit my consumption