Introduction

Question 1

What is market failure?

Answer 1

An inefficient allocation of scarce resources in the market which causes a loss in social welfare.

Question 2

What are the three main types of market failure?

Answer 2

1) Under provision of public goods
2) Externalities
3) Imperfect information

Question 3

What is a public good?

Answer 3

A public good is a good which is non-rivalrous and non-excludable, meaning they are underprovided by the private sector due to th efree-rider issue.

Question 4

What are externalities?

Answer 4

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

Question 5

What are information gaps?

Answer 5

Information gaps are when consumers and producers have different levels of information about the same economic transaction.