Market failures

Question 1

What is market failure?

Answer 1

Occurs when the free market fails to deliver an efficient allocation of resources

Question 2

What causes market failure? (7)

Answer 2

Negative externalities 
Positive externalities 
Imperfect information
Public goods 
Monopolies 
Immobility of factors of production 
Unequal distribution of income

Question 3

What are externalities?

Answer 3

Costs or benefits that spill over to third parties external to a market transaction

Question 4

How do externalities cause market failure?

Answer 4

If the price mechanism does not take into account of the wider costs and benefits to society

Question 5

What is the marginal private cost?

Answer 5

The cost to an individual or firm of an economic transaction

Question 6

What is the marginal external cost?

Answer 6

The spillover cost to third parties of an economic transaction

Question 7

What is the marginal social cost?

Answer 7

The full cost to society of an economic transaction, including private and external costs

Question 8

What are negative externalities?

Answer 8

A negative spillover effect to a third party member

SC>PC

Question 9

What are positive externalities?

Answer 9

A positive spillover effect to a third party member

SB>PB

Question 10

What is a merit good?

Answer 10

A good that would be under-consumed in a free market

Question 11

How do merit good cause market failure? (2)

Answer 11

Individuals are not aware of the full benefits, information failure
Or there is partial market failure, the good is provided but in the wrong quantity

Question 12

What is partial market failure?

Answer 12

Where the free market provides a product but with a misallocation of resources

Question 13

What is information failure?

Answer 13

Consumers are unaware of the full costs or benefits of what they are consuming

Question 14

What is a demerit good?

Answer 14

A good that would be over-consumed in a free market

Question 15

What is a public good?

Answer 15

A good that is non-rivalry and non-excludable

Question 16

What is the free-rider problem?

Answer 16

Where some consumers benefit from other consumers benefit from other consumers purchasing of a good

Question 17

What is a quasi-public good?

Answer 17

A good that has some of the qualities of a public good

Question 18

What is a private good?

Answer 18

A good that is both excludable and rivalry

Question 19

How do public good cause market failure?

Answer 19

The good is not normally provided by the government because they would be unable to supply them for a profit. Will result in complete market failure

Question 20

What is complete market failure?

Answer 20

Where the free market fails to provide the product at all

Question 21

What is a monopoly?

Answer 21

A firm that has 25% or more market share

Question 22

What is a pure monopoly?

Answer 22

When one firm has 100% market share

Question 23

How does a monopoly cause market failure? (4)

Answer 23

High profits
No incentive to produce goods that consumers value
Consumers cannot switch to alternatives
Resources are not allocated efficiently

Question 24

What are the potential benefits of a monopoly? (3)

Answer 24

R&D
Economies of scale
International competitiveness

Question 25

What is occupational immobility?

Answer 25

Workers may find it difficult to secure new jobs, since they lack the skills required

Question 26

What is geographical immobility?

Answer 26

Workers find it difficult to move to where employment opportunities are

Question 27

How does immobility of factors of production cause market failure?

Answer 27

Because workers are out of jobs, there is a waste of human capital

Question 28

What is income?

Answer 28

A flow of earnings to a factor of production over a period of time

Question 29

What is wealth?

Answer 29

A stock of owned assets