1.3.1 - Types of market failure

Question 1

What is market failure ?

Answer 1

When the Free market fails to allocate resources efficiently/ at the social optimum level.

leading to inefficient outcomes and therefore a net welfare loss to society.

Question 2

What are the 3 main types of market failure ?

Answer 2

1. Externalities
2. Under-provision of public goods
3. Information gaps

Question 3

What are externalities ?

Answer 3

The cost or benefit a third party receives from an economic transaction outside of the market mechanism.

Negative externality would be the cost.

Positive externality would be the benefit.

Question 4

What are Private costs/benefits ?

Answer 4

The costs/benefits to the individual participating in the economic transaction.

Demand curve = private benefits.
Supply curve = Private costs.

Question 5

What are Social costs/benefits.

Answer 5

The costs and benefits of the economic transaction as a whole.

Question 6

What are external costs/benefits

Answer 6

pos & neg externalities

Question 7

Merit goods

Answer 7

Goods and services with external benefits.

Question 8

Demerit goods

Answer 8

Good and services with external costs.