Market Failure 1

Question 1

‘What is market failure?’

Answer 1

‘Market failure occurs when resources are ineffectively allocated due to imperfections in the market mechanism.’;

Question 2

‘What are merit goods?’

Answer 2

‘Merit goods are goods and services that society judges as good but are underprovided by the market.’;

Question 3

‘What are examples of merit goods?’

Answer 3

‘Examples of merit goods include education

Question 4

‘What are demerit goods?’

Answer 4

‘Demerit goods are goods that society judges as bad

Question 5

‘What is an externality?’

Answer 5

‘An externality is a cost or benefit external to an exchange

Question 6

‘What is a positive externality?’

Answer 6

‘A positive externality is a benefit gained by third parties

Question 7

‘What is a negative externality?’

Answer 7

‘A negative externality is a cost imposed on third parties

Question 8

‘What is an example of an external cost in production?’

Answer 8

‘A factory polluting a river

Question 9

‘What is an example of an external cost in consumption?’

Answer 9

‘Smoking in public areas

Question 10

‘What is an example of an external benefit in production?’

Answer 10

‘Recycling reduces landfill waste and supports sustainable development.’;

Question 11

‘What is an example of an external benefit in consumption?’

Answer 11

‘Education increases skills and productivity

Question 12

‘What is the free-rider problem?’

Answer 12

‘The free-rider problem occurs when individuals consume a good without paying for it

Question 13

‘Why do monopolies cause market failure?’

Answer 13

‘Monopolies restrict output and charge higher prices

Question 14

‘What is allocative inefficiency?’

Answer 14

‘Allocative inefficiency occurs when resources are not used to maximize consumer satisfaction

Question 15

‘How does the government address market failure from monopolies?’

Answer 15

‘The government uses regulators like the Competition and Markets Authority (CMA) and enforces antitrust laws.’;

Question 16

‘What is a public good?’

Answer 16

‘A public good is non-excludable and non-rivalrous

Question 17

‘Why are public goods underprovided in a free market?’

Answer 17

‘Because individuals can benefit without paying (free-rider problem)

Question 18

‘How does the government address the underprovision of public goods?’

Answer 18

‘The government provides public goods directly and funds them through taxation.’;

Question 19

‘What is the role of taxation in addressing market failure?’

Answer 19

‘Taxation discourages the consumption of demerit goods and funds the provision of merit and public goods.’;

Question 20

‘What is the tragedy of the commons?’

Answer 20

‘The tragedy of the commons occurs when individuals overuse a shared resource

Question 21

‘What tools do governments use to address negative externalities?’

Answer 21

‘Governments use taxes

Question 22

‘What are the characteristics of public goods?’

Answer 22

‘Public goods are non-excludable and non-rivalrous

Question 23

‘What are examples of public goods?’

Answer 23

‘Examples include street lighting