Y1 22 - Types Of Market Failure

Question 1

Market failure

Answer 1

When the free market fails to allocate scarce resources of the socially optimum level of output

Question 2

Market failure causes

Answer 2

-Negative and positive externalities( self interest)
-Merritt and demerit goods
-public goods(the free ride a problem)
-common access res sources
-Income inequality
-Monopoly power
-Factor immobility

Question 3

Negative and positive externalities
(self-interest)

Answer 3

Negative effects on third-party is due to the production or consumption
Won’t be accounted for in the free market mechanism consumers what ignore impacts on the third parties when they consume
Phones will impact on third parties when they produce firms are profit maximises and only consider their private costs
Consumers are maximises and only consider their private benefit
The fact that self interested here would be an issue if there are external costs or still a benefit

Question 4

Merit and demerit goods

Answer 4

Goods and services that are either worse for us than we think or better than we think
Problem is we don’t fully know just how good or bad these products are therefore there is imperfect information or information failure
This might make consumers make a rational decisions when they consume, which could lead to the allocation of scarce resources being too high or too low

Question 5

Public goods(free-rider problem)

Answer 5

Firms are profit motivated and they’ll be no supply of public goods at the end so that is a definite source of market failure

Question 6

Common access resources
Tragedy of the Commons
Self interest

Answer 6

Common access resources usually overconsumed and overproduced due to negative externalities in the production
Will be over production and over consumption due to self interest so private produces ignore the external costs when it comesl producing

Question 7

Income inequality

Answer 7

Can be a source of market failure on the crowns of equity, which means fairness
Problem with income inequality as a source of market failure is that it’s going to be someone’s opinion as to when income inequality becomes too high in a free market economy or in a free market itself
Inequity means unfairness
When income in equity gets too high that it decided to be unfair it could be argued to be a source of market failure

Question 8

Income inequality

Answer 8

Can be a source of market failure on the crowns of equity, which means fairness
Problem with income inequality as a source of market failure is that it’s going to be someone’s opinion as to when income inequality becomes too high in a free market economy or in a free market itself
Inequity means unfairness
When income in equity gets too high that it decided to be unfair it could be argued to be a source of market failure

Question 9

Monopoly power

Answer 9

We assume in a free market there are many buyers and sellers. We assume that there is good information and we assume that there is low or no barriers to entry and exit.
Breakdown the idea that there are many sellers in fact only one dominant seller
If we break down the idea that there are no low barriers to entry and we say that there are high barriers entry may rise monopoly power
The end result is that consumers are exploited with higher than socially optimal prices and lower than socially optimal quantities

Question 10

Factor immobility

Answer 10

We assume that when the man shifts writes in a market that supplies can respond and produce extra output responding to the incentive to increase price and make more profit
But they can’t produce more maybe factors of production on mobile supplies can’t produce that extra output and then we are left with a miss allocation of resources in the labour market
Maybe workers are not structurally unemployed (occupation immobile )
Or geographically in mobile, which can stop the perfect allocation of labour in a labour market leading to market failure