Market failure & government intervention

Question 1

what is market failure ?

Answer 1

market failure occurs when the market is unable to efficiently allocate scarce resources to meet the needs of society .

Question 2

why will there always be market failure ?

Answer 2

there will always be market failure due to allocative inefficiency

Question 3

what is government intervention ?

Answer 3

government intervention occurs when the government intervene within the economy/markets in order to remedy ineffcient markets .

Question 4

what is over and under consumption ?

Answer 4

over consumption is when too much of a product is being consumed in an economy .

under consumption occurs when too little of a product is being consumed in an economy .

Question 5

what is over and under production ?

Answer 5

over production is when too much of a product is being produced

under production is when too little of a product is being produced in an economy .

Question 6

what is the role of the government ?

Answer 6

the role of the government is to eliminate government failure and provide welfare

Question 7

what is a public good ?

Answer 7

a public good is when it is used by an individual but does not stop others from using it .
e.g street lights

Question 8

what is a free rider ?

Answer 8

someone who benefits from a good or service benefits without paying .

Question 9

how can the government intervene ?

Answer 9

• Taxation
• Buffer stock
• subsidies
• Price control

Question 10

what are Demerit /merit goods in a free market ?

Answer 10

merit goods - merit goods are undervalued goods

Demerit goods - demerit goods are overvalued goods

Question 11

what is asymmetric information?

Answer 11

asymmetric information is when one party in an transaction has greater knowledge of a product than the other

Question 12

what is information failure ?

Answer 12

this is when an economic agent dont have information about market conditions therefore , they may not be able to take rational decisions

Question 13

what is indirect tax

Answer 13

• tax on a good or a service

Question 14

what is government failure ?

what are the causes of market failure?

Answer 14

• when the government intervene in the market in an attempt to correct market failure , however fail
• Distortion of price signals
• Unintended Consequences
• information gaps e.g asymmetric information

Question 15

what is buffer stock ?

Answer 15

buffer stock is stock that is held by the government to stabilise prices if their is dis-equilibrium