Market Failure 1 Flashcards
‘What is market failure?’
‘Market failure occurs when resources are ineffectively allocated due to imperfections in the market mechanism.’;
‘What are merit goods?’
‘Merit goods are goods and services that society judges as good but are underprovided by the market.’;
‘What are examples of merit goods?’
‘Examples of merit goods include education
‘What are demerit goods?’
‘Demerit goods are goods that society judges as bad
‘What is an externality?’
‘An externality is a cost or benefit external to an exchange
‘What is a positive externality?’
‘A positive externality is a benefit gained by third parties
‘What is a negative externality?’
‘A negative externality is a cost imposed on third parties
‘What is an example of an external cost in production?’
‘A factory polluting a river
‘What is an example of an external cost in consumption?’
‘Smoking in public areas
‘What is an example of an external benefit in production?’
‘Recycling reduces landfill waste and supports sustainable development.’;
‘What is an example of an external benefit in consumption?’
‘Education increases skills and productivity
‘What is the free-rider problem?’
‘The free-rider problem occurs when individuals consume a good without paying for it
‘Why do monopolies cause market failure?’
‘Monopolies restrict output and charge higher prices
‘What is allocative inefficiency?’
‘Allocative inefficiency occurs when resources are not used to maximize consumer satisfaction
‘How does the government address market failure from monopolies?’
‘The government uses regulators like the Competition and Markets Authority (CMA) and enforces antitrust laws.’;
‘What is a public good?’
‘A public good is non-excludable and non-rivalrous
‘Why are public goods underprovided in a free market?’
‘Because individuals can benefit without paying (free-rider problem)
‘How does the government address the underprovision of public goods?’
‘The government provides public goods directly and funds them through taxation.’;
‘What is the role of taxation in addressing market failure?’
‘Taxation discourages the consumption of demerit goods and funds the provision of merit and public goods.’;
‘What is the tragedy of the commons?’
‘The tragedy of the commons occurs when individuals overuse a shared resource
‘What tools do governments use to address negative externalities?’
‘Governments use taxes
‘What are the characteristics of public goods?’
‘Public goods are non-excludable and non-rivalrous
‘What are examples of public goods?’
‘Examples include street lighting
