Market Failure

Question 1

Profit-signalling Mechanism

Answer 1

Ensures businesses do not produce goods and services that do not sell for very long. Instead they will produce goods which are wanted by the consumer at the given time as they generate profit because customers want to buy them.

Question 2

Allocative Efficiency

Answer 2

When a firm produces at a price which is best for consumers - resources are allocated most efficiently.

Price = Marginal Costs.

Question 3

Public Good

Answer 3

Provided by the public sector because there is no profit incentive for private sector.

(Under-Produced).

Question 4

Merit Good

Answer 4

Under-consumed/under-produced goods which have positive externalities.

Question 5

Demerit Good

Answer 5

Are over-produced/over-consumed goods which have negative externalities.

Question 6

Non-rivalrous

Answer 6

When one person consumes a good it doesn’t affect or reduce the amount left for others to consume.

E.g. Street Light.

Question 7

Non-excludable

Answer 7

Impossible to prevent people who haven’t paid for the good to consume it.

This is why they are public goods as there is little profit incentive.

Question 8

Imperfect Information

Answer 8

Impairs the efficiency of markets because it leads to price distortions. Often buyers may pay more than they need to.

Question 9

Asymmetric Information

Answer 9

Occurs when either buyers or sellers do not have full information. The party with the full information can benefit at the expense of the other party.