Market Failure

Question 1

(‘What is market failure?’

Answer 1

‘Market failure occurs when there is an inefficient allocation of resources in a free market.’)

Question 2

(‘What are merit goods?’

Answer 2

‘Merit goods are those that people tend to under-consume without government intervention

Question 3

(‘Why are merit goods under-provided in a free market?’

Answer 3

‘Private sectors often fail to provide sufficient merit goods due to a lack of profit incentives

Question 4

(‘How does the government address the under-provision of merit goods?’

Answer 4

‘The government subsidizes or provides merit goods for free

Question 5

(‘What are public goods?’

Answer 5

‘Public goods are goods or services that can be consumed by multiple individuals simultaneously without reducing the availability to others

Question 6

(‘What is the free-rider problem?’

Answer 6

‘The free-rider problem occurs when individuals consume public goods without paying for them

Question 7

(‘How does the government ensure the provision of public goods?’

Answer 7

‘Public goods are provided and funded by the government through general taxation to prevent market failure.’)

Question 8

(‘What are externalities?’

Answer 8

‘Externalities are costs or benefits of an economic activity that affect third parties and are not reflected in market prices.’)

Question 9

(‘What is an example of a negative externality?’

Answer 9

‘Examples include pollution

Question 10

(‘How does the government address negative externalities?’

Answer 10

‘The government uses legislation

Question 11

(‘What are restricted competition and monopolies?’

Answer 11

‘Restricted competition occurs when a market has few sellers or buyers

Question 12

(‘Why do monopolies cause market failure?’

Answer 12

‘Monopolies restrict supply and charge higher prices

Question 13

(‘How does the government regulate monopolies?’

Answer 13

‘Through regulators like the Competition and Markets Authority (CMA) and legislation to ensure fair competition.’)

Question 14

(‘What is the role of the government in preventing market failure?’

Answer 14

‘The government intervenes using legislation

Question 15

(‘What is allocative inefficiency?’

Answer 15

‘Allocative inefficiency occurs when resources are not distributed in a way that maximizes consumer satisfaction

Question 16

(‘Why are public goods not provided by the free market?’

Answer 16

‘Because firms cannot ensure profit due to the free-rider problem

Question 17

(‘What is an example of a public good?’

Answer 17

‘Examples include police services

Question 18

(‘How do negative externalities misallocate resources?’

Answer 18

‘They lead to overproduction or overconsumption of harmful goods

Question 19

(‘What tools does the government use to combat market failure?’

Answer 19

‘Legislation

Question 20

(‘Why is the provision of public goods crucial?’

Answer 20

‘Public goods benefit society as a whole and would be underprovided without government intervention.’);