Market Failures and Imperfections

Question 1

What is a merit good? Provide an example.

Answer 1

A good that is under-consumed in a free market, e.g., education or vaccinations.

Question 2

What is a public good? Why is it not provided by the free market?

Answer 2

A good that is non-rivalrous and non-excludable (e.g., street lighting). Free riders prevent private provision. (Would result in a missing market if it wasn’t provided by the governmnet)

Question 3

How does imperfect information lead to market failure?

Answer 3

Consumers or producers make suboptimal decisions, leading to overconsumption (e.g., junk food) or underconsumption (e.g., insurance).