Market Failure

Question 1

Market failure

Answer 1

Occurs when free markets, operating without any government intervention, fail to allocate scarce resources efficiently and hence society’s welfare is not maximized

Question 2

General effect of externalities

Answer 2

The presence of externalities distorts the signalling function of market prices leading to resource misallocation

Question 3

Negative production/consumption externalities

Answer 3

Occur when the production/consumption of a good negatively affects the well-being of third parties

Question 4

Positive consumption externalities

Answer 4

Occur when the consumption of a good positively affects the well-being of third parties

Question 5

Public goods

Answer 5

Are goods or services that have the characteristics of non-excludability and non-rivalry in consumption

Question 6

Non-excludable

Answer 6

Non-excludable in consumption refers to the situation where the consumption or use of the good or service cannot be limited to the consumers who have paid for it

Question 7

Non-rivalry in consumption

Answer 7

Refers to the situation where the consumption or use of the good or service by one consumer does not exclude the consumption/use of the good by another consumer

Question 8

Asymmetric information

Answer 8

Arises when the economic agents (consumers and producers) involved in the transaction do not have the same amount of knowledge, resulting in a distortion of incentives and inefficient market outcomes

Question 9

Adverse selection

Answer 9

Occurs when one party to a transaction possesses information about a hidden characteristic that is unknown to other parties and takes economic advantage of this information

Question 10

Moral hazard

Answer 10

Occurs when an informed party takes an action that the other party cannot observe and that harms the less informed party

Question 11

Merit goods

Answer 11

Are private goods that have been deemed by the government as socially desirable but underconsumed when left to the free market

Question 12

Demerit goods

Answer 12

Are private goods that have been deemed by the government as socially undesirable but overconsumed when left to the free market

Question 13

Government failure

Answer 13

Could be defined as the situation where government intervention results in greater market inefficiencies than would otherwise occur without government intervention

Question 14

Equity

Answer 14

Is the fairness in distribution of economic welfare

Question 15

Income inequality

Answer 15

Is the extent of income disparity between high income and low income households