Market Failure

Question 1

What is meant by market failure?

Answer 1

It is a situation where an unregulated market (without government intervention) fails to allocate resources efficiently and equitably, resulting in social welfare not being maximized.

Question 2

What is wrong with the following explanation?

Street lighting is non-rivalrous because consumption of street lighting by one party does not reduce the amount left for others to consume.

Answer 2

The description is not CONTEXTUALISED enough, and only provides a definition of non-rivalry. The explanation below is preferred.

Street lighting is non-rivalrous because a lit street does not become dimmer after a pedestrian or vehicle has gone past it.

Question 3

What is wrong with the following explanation?

Street lighting is non-excludable because it is not feasible to exclude non-payers from consuming street lighting, once the service has been produced.

Answer 3

The description is not CONTEXTUALISED enough, and only provides a definition of non-excludability. The explanation below is preferred.

Street lighting is non-excludable because it is not feasible or very costly to construct physical barriers to exclude non-payers from accessing a lit street.

Question 4

Why is it important to illustrate the implications of non-rivalry and non-excludability when explaining how public goods result in market failure?

Answer 4

Explaining the features of non-rivalry and non-excludability only defines what a public good is. To explain how public goods result in market failure, the implications of both features need to be discussed.

Question 5

What is the implication of non-rivalry in the case of street lighting?

Answer 5

Being non rivalrous in consumption means that the supply of street lighting does not diminish with an additional consumer. Hence the marginal cost of serving another consumer is 0. For AE, P=MC, hence the price charged must be 0. However, no rational producer would produce it at zero price as they are profit driven.

Question 6

What is the implication of non-excludability in the case of street lighting?

Answer 6

Being non-excludable means that consumers can enjoy the good or service without paying for it. Hence, there is a free-rider problem where consumers are unwilling to pay for the use of the good. As a result, effective demand is concealed, which results in the loss of a price signal for the good.

Question 7

How do we contextualize our answer when explaining how the presence of externalities leads to market failure?

Answer 7

Be very specific on what the spillover effects are, and who the 3rd parties are. E.g. in the case of traffic congestion, 3rd parties are employers who face a fall in productivity when their workers are caught up in traffic jams.

Question 8

What is a general guide in drawing diagrams depicting deadweight loss?

Answer 8

The tip of the triangle always points towards the socially efficient level. In your written answer, explain that DWL is given by the difference between total social cost and total social benefit, based on the amount over/under-consumed or produced.

Question 9

Summarise the MEDICAL framework used for explaining how externalities result in market failure.

Answer 9

i. Market failure definition
ii. Externality explanation (identify spillover effects, 3rd parties and omission under the price mechanism)
iii. Diagram
iv. Identify MPB,MSB,MPC and MSC in context of the market and explain divergence between MPB/MSB or MPC/MSC
v. Compare equilibrium quantity (MPB cuts MPC) and socially-efficient quantity (MSB cuts MSC)
vi. Allocative inefficiency to be identified - over/under-consumption or production
vii. Loss in social welfare (deadweight loss) to be identified.

Question 10

Why does market failure result from the existence of imperfect information?

Answer 10

The free market allocates resources efficiently based on the assumption that consumers and producers have perfect information about goods and services, which allows them to make optimal choices (which maximizes their welfare). However, in real life, there is a risk of over/under-estimating the private benefits from consuming a good due to imperfect information.

Question 11

How does market failure result from the existence of market dominance?

Answer 11

Market dominance results in market failure as firms with market power (especially monopolies) are able to restrict output to increase profits. Hence there is under-production of the good (P>MC) and allocative inefficiency results.

Question 12

Why is there market failure when the price charged is above the marginal cost of production?

Answer 12

The marginal satisfaction that consumers derive from the consumption of an additional unit of the good (represented by the price) is higher than the cost to society from producing that additional unit (represented by the marginal cost). Hence there is underproduction and there will be a net gain in social welfare if more resources are diverted towards the production of the good.

Question 13

Why are factor of production not perfectly mobile?

Answer 13

There may be occupational and geographical barriers. Occupational barriers exist due to the mismatch of skillsets while geographical barriers exist due to genuine terrain impediments (e.g. poor transport network) or emotional reasons (e.g. sense of attachment) which inhibit labour movement.

Question 14

How does income inequality lead to market failure?

Answer 14

Producers are profit motivated and will only produce goods for consumers who are willing and able to pay for the good. Hence there is a lack of distributive efficiency, as only consumers with effective purchasing power (economic votes) will have access to the good, instead of those who need the good the most. This is most pertinent in the case of necessities.

Question 15

What is effective demand?

Answer 15

Reflects willingness and ability to pay for a good

Question 16

What are the 3 ways in which part (a) of a market failure essay can be REPHRASED?

Answer 16

1) Explain why a market fails
2) Explain why allocative efficiency is not achieved in a market
3) Explain why government intervention in a market is necessary

Question 17

When part (a) of a market failure question is REPACKAGED into the following form: “Differentiate between public goods and merit goods”, what should the answer contain?

Answer 17

1) Non rivalrous vs rivalrous nature of good
2) Non excludable vs excludable nature of good
3) Different forms of market failure (i.e. complete versus partial)

• For part 3), it suffices to highlight one aspect of market failure in the case of merit or demerit goods (e.g. imperfect information). Students do not have to explain in full the different types of market failure that exist in merit or demerit goods.

Question 18

When part (a) of a market failure question is OUTSOURCED into the following form: “Explain how the price mechanism allocates resources”, what should the answer contain?

Answer 18

1) Background explanation on price mechanism and self-interest
2) What and how much to produce (show demand and supply diagram depicting shortage or surplus)
3) How to produce
4) For whom to produce

Question 19

When part (a) of a market failure question is OUTSOURCED into the following form: “Explain how the price mechanism allocates resources EFFICIENTLY”, what should the answer contain?

Answer 19

1) Background explanation on price mechanism, self-interest and allocative efficiency
2) What and how much to produce (show demand and supply diagram depicting shortage AND surplus)

Question 20

What are the pros and cons of using a tax to tackle market failure resulting from negative externalities?

Answer 20

Pros

1) It internalizes the externality without overly disrupting the interaction of market demand and supply
2) Tax revenue can be generated to fund educational campaigns

Cons
1) There may be government failure hence leading to over or under taxation that does not eliminate deadweight loss. This is due to the inability of the government to estimate the size of the spillover cost with accuracy.
2) There may be hefty administrative costs incurred in enforcing the tax.
It may be less effective against consumers who have a price- inelastic demand for the good

Question 21

What are the pros and cons of using tradable permits to curb market failure resulting from negative externalities in production (e.g. pollution)

Answer 21

Pros

1) It creates incentive for profit-maximizing firms to reduce pollution since excess permits can be sold for extra revenue.
2) There is limited disruption to the free interaction of market demand and supply.

Cons

1) It is difficult to decide on a distribution of permits that is fair (e.g. should bigger firms get more permits?).
2) Wealthier and large firms can continue to pollute heavily by buying permits from smaller firms, leading to pollution being more serious in certain regions.
3) High administrative and enforcement costs.

Question 22

What are the pros and cons of using a ban to curb market failure resulting from negative externalities?

Answer 22

Pros
1) It is enforceable and effective

Cons

1) A deadweight loss will still be incurred, sometimes even larger than the original deadweight loss (recap diagram)
2) Proper enforcement is required to ensure compliance

Question 23

What are the pros and cons of using education or campaigns to curb market failure resulting from negative externalities?

Answer 23

Pros
1) Effects will be long-lasting since consumer mindsets and behavior are altered.

Cons

1) Takes time to work and hence effects can only be seen in the long-term
2) Depends on the receptiveness of consumers
3) Running such campaigns may put a strain on government resoures, and there is an opportunity cost associated with such spending.

Question 24

What are the pros and cons of using rules and regulations to curb negative externalities?

Answer 24

Pros
1) It is effective as it is enforceable and compulsory

Cons

1) It is a blunt instrument that distorts the free interaction of market demand and supply, and does not create long-lasting incentives for consumers or producers to proactively reduce the negative externality generated.
2) Enforcement costs

Question 25

Evaluate the effectiveness of using subsidies to tackle market failure in the case of positive externalities

Answer 25

Pros
1) It internalizes the externality without overly disrupting the interaction of market demand and supply

Cons

1) There may be government failure hence leading to over or under subsidisation that does not eliminate deadweight lost (government failure). This is due to the inability of the government to estimate the size of the spillover benefit with accuracy.
2) There may be a strain on the government’s budget to finance the subsidy.

Question 26

Evaluate the effectiveness of nationalization to tackle market failure in the case of positive externalities

Answer 26

Pros
1) It curbs allocative inefficiency arising from the underproduction of merit goods.

Cons

1) Duplication of output and wastage of resources if the government provides the good alongside private producers.
2) Higher extent of government failure arising from imperfect info (e.g. how much to provide)
3) Government failure could also take on the form of X-inefficiency. This is because a public producer is not profit-motivated and may have no incentive to minimize costs.

Question 27

Evaluate the effectiveness of using education and campaigns to tackle market failure in the case of positive externalities

Answer 27

Pros
1) Effects will be long-lasting since consumer mindsets and behavior are altered.

Cons

1) Takes time to work and hence effects can only be seen in the long-term.
2) Depends on the receptiveness of consumers
3) Campaigns and programs conducted may put a strain on the government’s budget and there may be an opportunity cost associated with such spending

Question 28

Evaluate the effectiveness of using rules and regulation to tackle market failure in the case of positive externalities

Answer 28

Pros
1) It is effective as it is enforceable and compulsory

Cons

1) It is a blunt instrument
2) There is significant distortion to the interaction of free market forces
3) Compliance must be ensured

Question 29

Evaluate the effectiveness of public provision to tackle market failure in the case of public goods.

Answer 29

Pros
1) It is the only effective measure to correct market failure arising from the existence of public goods

Cons

1) Government failure can arise in the form of imperfect information e.g. how much to produce
2) Government failure could also take on the form of X-inefficiency. This is because a public producer is not profit-motivated and may have no incentive to minimize costs.

Question 30

Evaluate the effectiveness of using price controls (AC or MC-pricing) to tackle market failure arising from market dominance (more applicable for natural monopolies).

Answer 30

Pros
1) It reduces the extent of allocative inefficiency arising from the under-production of the good (price is lowered and output is raised)

Cons

1) AC-pricing increases the incentive for monopolies to be x-inefficient
2) MC-pricing needs to be accompanied by a subsidy to compensate monopoly for their losses, which puts a strain on the government’s budget

Question 31

Evaluate the effectiveness of using deregulation (i.e. introduce more competition) to tackle market failure arising from market dominance.

Answer 31

Pros
1) A more competitive market results in a lower loss of allocative efficiency (price is lowered and output is raised.

Cons
1) There will be loss of EOS and gains from dynamic efficiency when monopolies are broken up.

Question 32

Evaluate the effectiveness of using campaigns to tackle market failure due to imperfect knowledge

Answer 32

Pros
1) Effectively tackles the root cause of the problem by filling in information gaps or rectifying product misconceptions.

Cons

1) May take a long time to work
2) Depends on the receptiveness of consumers

Question 33

Evaluate the effectiveness of retraining programmes in tackling market failure due to factor immobility

Answer 33

Pros
1) Effectively tackles the root of the problem by ensuring that worker skillsets are relevant and updated

Cons

1) Training takes time to bear fruit
2) Funds are needed to finance such programmes and may put a strain on the government’s budget

Question 34

What are some conflicts between microeconomic objectives?

Answer 34

1) Tradeoff between equity and externality problem

Explanation: For example, fuel subsidies help to reduce inequity, since they allow low-income families to consume fuel, which is a necessity used for cooking and heating. However, encouraging consumption of fuel generates more pollution and worsens the externality problem.

Resolution: While fuel subsidies can alleviate the problem of inequity, a more sustainable approach is to grow the income of low-wage families e.g. through skills-upgrading. Separately, policies to tackle the externality problem (taxes, regulation and education) need to be implemented.

2) Tradeoff between market dominance and externality problem

Explanation: Policies to tackle market dominance (e.g. in the airline industry) may entail granting more licences and opening up the industry to more competition. This results in a higher level of greenhouse gases emitted, which worsens the externality problem as well.

Resolution: Since the airline industry does not represent a natural monopoly, more competition should be encoueraged to tackle market inefficiencies resulting from market dominance. Separately, policies to tackle the externality problem (taxes, regulation and education) need to be implemented.

Question 35

When is the stacking approach used to tackle market failure?

Answer 35

When there is only one root cause of market failure.

Question 36

When is the slotting approach used to tackle market failure?

Answer 36

When there is more than one root cause of market failure.

Question 37

Under the stacking approach (i.e. only one root cause of market failure), how can policies be stitched together?

Answer 37

Highlight how a follow-up policy compensates for a limitation of the first policy.

Question 38

Under the slotting approach (i.e. more than one root cause of market failure), how can policies be stitched together?

Answer 38

Allocate each policy (or more than one policy) to a specific root cause of market failure.

Question 39

Should the government always intervene as long as market failure exists?

Answer 39

Generally, as long as there is market failure, the government should intervene. However, the crucial consideration is the extent of intervention and the choice of policy used to tackle the root cause of market failure. Nonetheless, if the deadweight loss is extremely small, the government may decide not to intervene in consideration of the opportunity cost of intervention (government resources could be devoted to other channels).

Question 40

What evaluative comments can we includewhen a question requires us to propose policies to tackle market failure?

Answer 40

By highlighting the changing nature of market failure (refer to guidebook for examples).

Question 41

Does public provision necessarily entail free provision?

Answer 41

Not necessarily. Only when the good is non-rivalrous and non-excludable in nature (public goods) would it be provided free-of-charge.

Otherwise, the government can still provide the good and charge a subsidised price to consumers (e.g. consultation fees in polyclinics).

Question 42

When should goods and services be provided free of charge?

Answer 42

There are 4 conditions under which goods should be provided FOC.

1) If it is a public good
2) When the good has an EMB so large that a complete subsidy is needed to fully internalize the externality (recap diagram)
3) To ensure equity, especially for necessities
4) When the marginal cost of producing the good is zero and it is a socially-desirable good, e.g. museums and public parks

Question 43

Can the marginal cost of production be zero, even if a good is rivalrous in nature?

Answer 43

Yes. Examples include public parks and museums.

Question 44

What are the 3 fundamental questions of resource allocation that the price mechanism seeks to address?

Answer 44

It seeks to answer 3 fundamental questions

1) What and how much to produce
2) How to produce
3) For whom to produce

Question 45

What are the 3 roles of the price mechanism?

Answer 45

1) Signaling function
2) Incentive function
3) Rationing function

Question 46

How do we reduce the occurrence of government failure?

Answer 46

To tackle imperfect information when deciding on the size of taxes and subsidies, ground checks can be conducted on the government’s part to determine the size of the EMC or EMB more accurately (e.g. surveys to check the cost of 2nd-hand smoke).

To tackle cost-inefficiencies due to the lack of a profit motive, audits and regular checks can be conducted on organizations to ensure that they remain competitive and efficient.

Question 47

What are the cases of market failure which justify the granting of a subsidy?

Answer 47

1) Positive externality
2) Equity

*Take note that recent questions may require students to infer the root causes of market failure from a given policy solution. This represents a change from “traditional” market failure questions which usually provide a given state of market failure, and requires students to infer policy solutions from there.

Question 48

What are the factors that a government may consider before deciding whether to intervene in a market?

Answer 48

1) Root causes of market failure (missing market i.e. in the case of public goods warrants direct government provision, while other forms of market failure justify intervention in more indirect ways.
2) Possibility of government failure (ensure you know the explanation of how government failure can be reduced).
3) Opportunity cost of resources used in intervention.

Question 49

What are the factors that a consumer considers when buying a good/service?

Answer 49

1) Marginal private cost - both explicit and implicit cost (i.e. opp cost)
2) Marginal private benefit
3) Ability to pay for the good

Question 50

Explain the changing nature of market failure in smoking, and the impact on policy solutions.

Answer 50

More young Singaporeans are picking up the habit of smoking. To deal with the changing demographics of smokers, the government has been increasing educational efforts e.g. ex-Singapore idol winner Taufik Batisah launching smoke-free campaigns in schools.

Furthermore, with rising population density in Singapore, the effects of 2nd hand smoke (i.e. the spillover cost) have the ability to affect more 3rd parties. To reduce the spillover costs of smoking, the government has also widened the ban on smoking to include most enclosed areas, as well as large parts of public areas such as coffee-shops.

Question 51

Explain the changing nature of market failure in healthcare, and the impact on policy solutions.

Answer 51

With higher life expectancy and a rapidly ageing population, there is a need to ensure sufficient healthcare facilities for the elderly. Other than reliance on a combination of subsidies and regulations under the 3M framework (Medisave, MediShield & Medifund), the government has accelerated the construction of nursing homes and public hospitals. Free health checks for the elderly are also provided.

With a rising population density in Singapore, the risk of spread of infectious diseases is higher. To address this issue, the government has adopted a combination of short-term and long-term policies. For example, in the short run, the government had imposed quarantine orders where patients with severe infectious diseases were temporarily segregated from the rest of the population. In the long run, the government had also taken pains to educate the citizens about good health habits e.g. staying home or wearing a mask if unwell.

Question 52

Explain the changing nature of market failure in gambling, and the impact on policy solutions.

Answer 52

With the two integrated resorts in Singapore, gambling has become more accessible. To tackle this problem, a $100 casino levy has been imposed on Singaporean casino patrons. There are also Exclusion Orders available to exclude potential addicts (with higher MEC) from visiting the casinos.

Question 53

Explain the changing nature of market failure in traffic congestion, and the impact on policy solutions.

Answer 53

With growing affluence of the population, demand for cars has continued to rise despite the rising cost of driving, with a number of households owning more than 1 car. To cope with this problem, the government has been building more highways to reduce traffic congestion. At the same time, the recent change in the COE quota system has dramatically increased the cost of COEs, making it prohibitively expensive to own a car. The government has also tried to promote the use of substitutes such as off-peak cars (can be driven on Saturdays too) and public transport (especially bus and train transport).

Question 54

Explain the changing nature of market failure in alcohol consumption, and the impact on policy solutions.

Answer 54

With more nightspots available in Singapore, drinking has become more prevalent. Drink-driving cases are also on the rise, which has increased the potential spillover cost of alcohol consumption. To tackle this problem, liquor laws have been strengthened. For example, the public will not be allowed to buy alcohol for take-away or consume alcohol at public places from 10.30pm to 7am daily. There are also strict penalties on drivers who drink and drive.

Question 55

Explain the changing nature of market failure in education, and the impact on policy solutions.

Answer 55

With greater labour mobility and increased competition from foreign labour, there is a need to enhance the education and skill level of local workers. To this end, the government has been boosting the standards of education in Singapore and encouraging more Singaporeans to pursue further education. This is done through increasing the supply of tertiary education in Singapore e.g. building a fourth university and more ITEs. The government has also formed an Aspire committee (Applied Study in Polytechnics and ITE Review) to enhance education and career prospects for ITE and polytechnic graduates.

Question 56

When depicting a ban diagram, what is the first step involved?

Answer 56

Both social curves need to touch the y-axis.

Question 57

When depicting two situations – one justifying a ban (i.e. DWL from ban lower than DWL from externality), and another not in favour of a ban (i.e. DWL from ban higher than DWL from externality), what is the difference between the two diagrams?

Answer 57

In the first case, the MSC is higher than the second case. A higher MSC (keeping MPC unchanged) means that the spillover cost from the activity is higher, hence justifying a ban. Try drawing the diagram to see this point yourself.

Question 58

When depicting a complete subsidy, what are the steps involved?

Answer 58

1) Ensure MPB curve and MPC curve (post-subsidy) intersect on the x-axis
2) Vertically above this point, allow MSC (= original MPC) and MSB to intersect
3) Identify equilibrium and socially-efficient output levels.

Question 59

Does public provision always indicate free provision?

Answer 59

No, except in the case of public goods. Public goods are provided free-of-charge by the government due to the two distinct features of (i) non-rivalry and (ii) non-excludability. As such, free government provision is unique to the case of public good, and students should not assume that every time the government provides a good (e.g. merit goods such as healthcare or education), it has to be provided at zero cost.

Question 60

Explain government failure

Answer 60

Government failure mainly takes the form of (i) imperfect information on the government’s part; (ii) cost inefficiencies within a government monopoly; and (iii) distraction by political goals.

Question 61

What does rational behavior in producers and consumers mean?

Answer 61

When discussing rational decision-making, we should explain how firms and consumers seek to maximize self-interest given the limits posed by scarcity.

Firms seek to maximise profits, while consmers seek to maximise satisfaction.

Question 62

Explain why a subsidy shifts MPC and not MSC.

Answer 62

This is because if MSC were to shift, the socially-efficient output level, i.e. Qse will ‘run’, since MSC now intersects MSB at a different point.

One way to think about this is that other parties within society are financing the cost of the subsidy. Hence, the reduction in private cost to the consumer is netted off with the increase in cost to other members in the society due to the need to finance the subsidy. Hence, MSC remains unchanged overall.

Question 63

Can we combine market failure arising from the existence of an externality and imperfect information into one diagram?

Answer 63

Preferably not. When explaining market failure due to imperfect information, we should avoid mentioning that consumers are unaware of the presence of externalities, (hence overlapping two sources of market failure).

Rather, we should treat each form of market failure as distinct from one another.

Question 64

Explain MPC and MPB in the context of an externality arising from consumption activities.

Answer 64

Generally, in consumption activities, MPC represents the cost of the good, while MPB represents the satisfaction that a consumer can derive from consuming the good.

However, in the case of demerit goods, MPC may extend beyond cost of the good to include other private costs, e.g. smoking causes adverse health effects. Similarly, MPB for a merit good extends beyond consumer satisfaction, e.g. a consumer of healthcare may enjoy better health status as a result.

Question 65

Name examples of public goods

Answer 65

1) Street lighting
2) National defence
3) Flood control
4) Dengue control
5) Traffic lighting
6) National day fireworks

Question 66

What are the 3 points to note when explaining how an externality results in market failure?

Answer 66

Recall that the definition of an externality has three aspects: (i) spillover cost/benefit; (ii) affecting third parties; and (iii) not considered by price mechanism).

These features should be discussed when explaining why a particular good generates spillover effects.

Question 67

Why is market dominance not a major cause of market failure in Singapore?

Answer 67

This is due to the openness of the Singapore economy, which allows foreign competition to erode the market share of incumbent firms.

While a few other monopolies exist in Singapore, e.g. Public Utilities Board or SMRT (train service provider), these firms are usually nationalised or heavily regulated to protect consumer welfare. Furthermore, the Competition Commission of Singapore acts as a watchdog against collusive behavior, which reduces the buildup of monopoly power.

Question 68

Why is a missing market (i.e. public goods) a major cause of market failure in any context?

Answer 68

This is due to complete market failure in the private market, since no resources are diverted towards the production of such goods.

Question 69

Why are externalities a major cause of market failure in any context?

Answer 69

In the case of market failure due to the presence of externalities, active government regulation is required on an ongoing basis, given the changing nature of the problem (see above questions on changing nature of market failure in different contexts).

Question 70

What should students note when labeling the x-axis in externality diagrams?

Answer 70

The x-axis always reflects the UNDERLYING good or activity which is responsible for generating the externality (e.g. quantity of driving, and not quantity of congestion!)

Question 71

Which framework should be used when a question asks whether a SPECIFIC policy is appropriate for tackling a root cause of market failure?

Answer 71

CHLOE framework.

i. Identify root Cause of market failure
ii. Explain How the recommended policy works
iii. Discuss Limitations of recommended policy
iv. Recommend Other policies to complement the above policy
v. Evaluation (can suggest circumstances under which the recommended policy would be more appropriate).

Question 72

Which framework should be used when a question asks whether a government (usually Singapore) has done well in tackling a root cause of market failure?

Answer 72

Slotting or stacking

Question 73

Why is public provision not the best way to tackle market failure in the case of merit goods?

Answer 73

Public provision entails a greater extent of government failure (due to cost-inefficiencies and imperfect information)

Question 74

Why is a ban not the best way to tackle market failure in the case of demerit goods?

Answer 74

A complete ban generates significant deadweight loss.

Question 75

How do you illustrate a partial ban diagrammatically?

Answer 75

Depict two cases – one where we ban (DWL from ban lower), and one where we do not ban (DWL from ban higher). The two cases can be depicted by adjusting the position of MSC.

Question 76

How do you identify when to use the stacking or slotting approach?

Answer 76

Remember that if the form of market failure in question pertains to a certain EFFECT (e.g. 2nd hand smoke), then it should relate to an externality (1 root cause of market failure) and the stacking approach should be used.

If it pertains to a MARKET (e.g. market for cigarettes), it is usually a merit or demerit good (multiple causes of market failure), which warrants the use of the slotting approach.

Question 77

What is the impact of fitting catalytic converters to factory emission chimneys? (show diagrammatically)

Answer 77

It reduces the spillover cost associated with the activity. Hence, we shift MSC downwards while holding MPC constant.

Question 78

What is the most important point to note when discussing policy solutions to market failure?

Answer 78

EVALUATION of policy effectiveness and limitations.

Question 79

Summarise the DICE framework for explaining why a market fails.

Answer 79

1) Define market failure
2) Identify root cause of market failure
3) Contextualise your answer
4) Explain in full, using diagrams where necessary.

Question 80

When are diagrams necessary in explaining market failure?

Answer 80

1) Externalities
2) Imperfect information
3) Market dominance