Market And Government Failure

Question 1

What are the types of Market Failure?

Answer 1

• Asymmetrical information
• Information gaps
• Public goods
• Negative and positive externalities
• Equity (Fairness) issues

Question 2

What are negative externalities?

Answer 2

A negative effect in a third party outside the externality

Question 3

What are positive externalities?

Answer 3

A product which has a positive impact on the third party. The problem is that right now it’s under valued and under consumed.

Question 4

What are subsidies?

Answer 4

Direct payments that governments provide businesses to offset operating costs

Question 5

What are the examples of government intervention?

Answer 5

• Subsidies(food) and indirect tax(petrol)
• Minimum(alcohol) and maximum pricing (rent)
• Road pricing (driving)
• Provision of public goods
• Information gaps
• Pollution permits

Question 6

What is government failure?

Answer 6

When the government attempts to correct market failure - and fail themselves.

Question 7

What is asymmetric information?

Answer 7

This type of market failure exists when one party and uses that advantage to exploit the other party.

Question 8

What are the government interventions aimed at closing the information gap?

Answer 8

Compulsory labelling on cigarettes packages, improved nutrition info on foods, industry standards etc.

Question 9

What is market failure?

Answer 9

When the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss.

Question 10

What is complete market failure?

Answer 10

Occurs when the market simply does not supply products at all - we see ‘missing markets’

Question 11

What is partial market failure?

Answer 11

Occurs when the market does function but it produces either the wrong quantity of a product or at the wrong price (often leads to government intervention).

Question 12

What three things are public goods?

Answer 12

Non excludability, non rival consumption and non rejectable.

Question 13

What is a quasi public good?

Answer 13

A near public good

Question 14

What is the free rider problem?

Answer 14

People benefitting from a good and not having to pay for it.

Question 15

Why are pure public goods not provided by the private sector?

Answer 15

Because they would be unable to supply them for a profit

Question 16

What is non excludability?

Answer 16

Public goods cannot be confined solely to those who have paid for it

Question 17

What is non rival consumption?

Answer 17

Consumption by one consumer does not restrict consumption by other consumers

Question 18

What is non rejectable?

Answer 18

Collective supply of public good for all means it cannot be rejected by people (e.g flood defences)

Question 19

What is a merit good?

Answer 19

A commodity or service that is regarded by society/government as deserving public finance. The opposite is a demerit good. A merit good will be under consumed.

Question 20

What is a demerit good?

Answer 20

Where consumption leads to a negative impact on the consumer and the society.

Question 21

What are the benefits for increased government spending on public goods?

Answer 21

Economies of scale, access and affordability, state provision(to overcome market failure), public goods drive long run economic growth

Question 22

What are the risks of increased government spending on public goods?

Answer 22

Absence of profit motive, links with corruption, wasteful spending could lead to government failure