Market Forces And Market Failure 1

Question 1

Market failure

Answer 1

Market forces lead to a misallocation of resources

Question 2

Allocative efficiency

Answer 2

Resources are allocated such that they best meet the demands of society.

Question 3

Partial market failure

Answer 3

Free market provides a product but with a misallocation of resources

Question 4

Complete market failure

Answer 4

Free market fails to provide the a product at all

Question 5

6 forms of market failure

Answer 5

1. Public goods
2. Externalities
3. Merit and demerit good
4. Imperfect information
5. Monopoly power
6. Factor immobility

Question 6

Public good

Answer 6

A good that would not be provided at all by a free market.

Question 7

Externalities

Answer 7

An externality is a spoilover effect of an action that fails on a third party not involved in action

Question 8

negative externality

Answer 8

The cost of an action that falls on a third party

Question 9

Merit good

Answer 9

A good which social benefits of consumption exceed the private benefits and would be under consumed in a free market.

Question 10

2 ways a merit good could be under consumed

Answer 10

1. Imperfect information - unaware of benefits of consuming good
2. Positive externalities - most merit goods have positive externalities in consumption, but consumers are not considering the positive effects.

Question 11

De merit good

Answer 11

A good which social benefits of consumption are lower than the private benefits and would be over-consumed in a free market. (alcohole and cigarette)

Question 12

2 ways de merit goods could be over consumed

Answer 12

1. Imperfect information - unaware of the drawbacks of consumption of good. Lead to information failure.
2. Negative externalities - contain negative externalities in consumption but people dont consider negative effects