Market Failure

Question 1

Market Failure

Answer 1

where resources are inefficiently allocated due to imperfections in the working of the market mechanism.
ex: public goods like street lights

Question 2

Negative Externalities

Answer 2

an externality is the difference between social costs and benefits and private costs and benefits. If net social cost (social cost minus social benefit) is greater than net private cost (private cost minus private benefit), then a negative externality or external cost exists.
ex: second hand smoke

Question 3

Positive Externalities

Answer 3

an externality is the difference between social costs and benefits and private costs and benefits. If net social cost (social cost minus social benefit) is less than net private cost (private cost minus private benefit), then a positive externality or external cost exists.
ex: if you receive an education you have a private benefit of being intelligent but there are positive externalities for society because you are able to use your human capital to aid in the production of goods and services that others want to consume

Question 4

Merit Goods

Answer 4

a good which is under provided by the market mechanism. It is a good that provides positive externalities by helping other members of society
ex: education

Question 5

Demerit Goods

Answer 5

a good which is over provided by the market mechanism. It is a good that provides negative externalities by hurting other members of society
ex: cigarettes