Market Failure 1.3

Question 1

What are the 3 types of market failure?

Answer 1

• Externalities
• Under provisions of goods
• Information Gaps

Question 2

What is an externality?

Answer 2

The third-party cost or benefit from the consumption of a good from someone else

Question 3

When do Negative production externalities occur?

Answer 3

When social costs are greater than private costs

Question 4

When do positive consumption externalities occur?

Answer 4

When social benefits are greater than private benefits

Question 5

What are the 2 features of public goods?

Answer 5

• Non-excludable: You cannot stop someone from using them
• Non-rivalrous: The consumption of the good by one person does not stop the consumption of others

E.g., streetlamps

Question 6

What is the free-rider problem?

Answer 6

You cannot charge an individual price of non-excludable goods, therefore the public goods must be supplied by the Government because the free-market will not (not profitable for them)

Question 7

What is asymmetric information?

Answer 7

When one party has greater knowledge than the other

Question 8

What are information gaps?

Answer 8

When there is a lack of information