Types Of Market Failure

Question 1

When market failure occurs

Answer 1

-Market failure occurs when the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources.

-Economic and social welfare is not maximised where there is market failure

Question 2

Types of market failure

Answer 2

-Externalities-An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism. In other words, it is the spill-over effect of the production or consumption of a good/service.

-The under-provision of public goods-Public goods are non-excludable and non-rival, and they are underprovided in a free market because of the free-market problem.

-Information gaps-It is assumed that consumers and producers have perfect information when making economic decisions. However, this is rarely the case, and this imperfect information leads to a miss allocation of resources.

Question 3

Non-excludable and non-rival

Answer 3

-Non-excludable goods are public goods that cannot exclude a certain individual or group of individuals from using them-it is difficult or impossible to prevent someone from enjoying the benefits of the good, even if they do not contribute to its production.

-Non-rivalry means that consumption of a good by one person does not reduce the amount available for others