Economics - 1.3.1 Types of market failure
Externalities - correct answer-is the cost or benefit a third party receives from an economic
transaction outside of the market mechanism. e.g negative externalities such as cars and
cigarettes. Positive externalities such as education and healthcare which is underprovided
Information gaps - correct answer-it is assumed that consumers have perfect information
allowing them to make rational decisions. Similarly, firms are assumed to have perfect
information on their cost and revenue curves and governments are assumed to know the full
cost and benefits of each decision. In reality, this is not the case. Therefore, economic
agents do not always make rational decisions, so resources are not allocated to maximise
welfare
Types of market failure - correct answer-- Externalities
- Under provision of public goods
- Information gaps
under-provision of public goods - correct answer-public goods are non-rivalry and
non-excludable meaning they are under provided by the private sector due to the free rider
problem.
What is Complete market failure? - correct answer-Complete market failure is when markets
may not exist (aka missing markets) leading to no production of a good or service
What is market failure? - correct answer-Market failure is when resources are inefficiently
allocated due to imperfections in the working of the market mechanism
What is Partial market? - correct answer-Partial market failure is when markets may lead to
the overproduction or underproduction of goods
What is the role of the market? - correct answer-The role of the market is to allocate scarce
resources efficiently. In many cases markets are an extremely efficient way of doing this.
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