Misallocation of resources

Question 1

What is market failure?

Answer 1

Market failure occurs when a market is unable to distribute resources efficiently

Question 2

What causes the misallocation of resources?

Answer 2

• Public goods (Government has to provide them)
• Positive and negative externalities
• Demerit and merit goods (bad and good)
• Monopolies

Question 3

What are the costs of market failure?

Answer 3

• Costs to society: money is needed for consequences of the actions
• Quality of life is poorer: global warming
• Inequality: only rich can afford certain goods and services

Question 4

What are some Government interventions to counter the misallocation or resources?

Answer 4

• Indirect tax: demerit goods to raise price
• Subsidies: merit goods to lower tax
• Maximum price: merit goods to lower price
• Minimum price: demerit goods to raise price
• Direct provision: merit goods to make them free