Market failure

Question 1

What is market failure

Answer 1

• Market failure happens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss

Question 2

Causes market failure

1-2-3

Answer 2

• Externalities
• Lack of public goods
• Information

Question 3

Consumption externalities

Answer 3

Positive:
- This is a benefit created in consumption of a good
- MSB > MPB
Negative:
- eg fags
- MSB < MPB

Question 4

Issues with public goods

Answer 4

• Free rider problem

- Issues with pricing

Question 5

Define:

1) Merit goods

2) Demerit goods

Answer 5

1) Merit goods and services create positive externalities when consumed
2) A demerit good is defined as a good which can have a negative impact on the consumer

Question 6

Reasons for government intervention

Answer 6

• Meeting basic needs
• Overconsuming demerit goods
• Underconsuming merit goods
• Irrationailty