Types of market failure

Question 1

Externalities

Answer 1

An externality is the cost or benefit a third party receives . Neg externalities are caused by the consumption of demerit goods such as cigarettes. Positive externality are caused by consumption of merit goods

Question 2

Information gaps

Answer 2

It is assumed that consumers and producers have perfect information when making economics decisions. However, this is rarely the case and this imperfect information led to misallocation of resources

Question 3

Monopolies

Answer 3

Since the consumers have very little choice where to buy the good and service offered by a monopoly they are often over charged. This leads to underconsumption of the good or service and therefore there is misallocation of resource income consumer need and wants are not fully met.

Question 4

Inequalities in distribution to income and wealth

Answer 4

There is an inequitable distribution of income and wealth. Income refers to the flow of money whilst wealth refers to the stock of assets. this can lead to negative externalities such as social unrest.