Market Failure

Question 1

What’s market failure?

Answer 1

Market failure is where the market mechanism fails to allocate resources efficiently, causing a loss of social welfare.

Question 2

What are negative externalities in production?

Answer 2

The cost to third parties as a result of the actions of producers. (Pollution, deforestation, etc).

Question 3

What are negative externalities in consumption?

Answer 3

The cost to a third party as a result of the actions of consumers. (Smoking, alcohol, etc).

Question 4

What are positive externalities in production?

Answer 4

The benefits to third parties as a result of the actions of producers. (in-work training, R+D). They’re over consumed and over provided.

Question 5

What are positive externalities in consumption?

Answer 5

The benefits to third parties as a result of the actions of consumers. (Healthcare, education, etc). They’re under consumed and under provided.

Question 6

What are merit goods?

Answer 6

Goods that are beneficial for consumers. They’re under consumed and under provided. (healthcare, education, etc)

Question 7

What are demerit goods?

Answer 7

Goods that are damaging for consumers. They’re over consumed and over provided. (cigarettes, gambling, etc).

Question 8

What are public goods?

Answer 8

Goods that are provided by the government, otherwise there would be a missing market. They’re non-excludable, non-rival and non-rejectable. The free rider problem states that people will benefit from public goods without having to pay for them. (street lights, defences, etc).