Chapter 11 Market failure

Question 1

Public goods

Answer 1

Public goods are goods that can be collectively consumed and are both non-rivalry in consumption and non-excludable

Question 2

Non-rivalry

Answer 2

Consumption of the good does not reduce the total supply available to others
The benefit can be shared jointly by everyone who happened to be in the vicinity

Question 3

Non-excludability

Answer 3

Once the good is made available, it is difficult or costly to exclude non-payers from consuming it

Question 4

Public good explanation

Answer 4

Since there is no demand (due to non-excludable) and no supply (non-rivalry), this will result in a missing market
There is zero-consumption of a socially desirable good due to the market’s non-existence
its non-provision significantly deprives society from reaping the significant welfare gains (hence, incurring deadweight loss).

Question 5

Externalities

Answer 5

An externality is a cost or a benefit arising from an economic activity (production or consumption) that falls on a third party and is not taken into account by those who directly participate in economic activity

Question 6

Efficient allocation of resources

Answer 6

Efficient allocation of resources in a market implies that adequate available resources are used in the production of goods or services to bring about maximum total economic surplus