Market Failure

Question 1

Market Failure

Answer 1

A situation where the allocation of resources does not lead to a combination of production which maximises society’s needs, wants and living standards

Question 2

Asymmetric information

Answer 2

When sellers and buyers do not both have equal information, preventing rational and efficient decisions about the allocation of resources to be made, and leading to an overallocation
-E.g., insider trading

Question 3

Government policies to Prevent Asymmetric Information

Answer 3

-Full disclosure laws (e.g., labelling)
-Government informing and adverting campaigns (education surrounding potential dangers of certain products)

Question 4

Public Goods

Answer 4

-Non excludable (supplier cannot prevent use, anyone can use it)
-Non-rivalrous (consumption of one does not affect consumption by another)
-Free-rider problem - where producers are not incentivised to produce (low profits), causes underallocation of resources to public goods

Question 5

Government Policies for Public goods

Answer 5

-Subsidies for production of public goods
-Government provision (through taxes)

Question 6

Externalities

Answer 6

When production/consumption of a good or service has extra costs/benefits on a third party

Question 7

Negative Externalities

Answer 7

Costs paid by third parties for the production/consumption of a good or service
-Overallocation of resources

Question 8

Positive Externalities

Answer 8

Benefits received by third parties following the production/ consumption of a g/s
-Underallocation of resources

Question 9

Government policies for negative externalities

Answer 9

-Government laws (e.g., legislation to change behavior)
-Indirect tax
-Educational programs about sustainability to discourage consumers

Question 10

Government policies for positive externalities

Answer 10

-Subsidies to underproduced areas
-Government production of socially desirable goods (e.g., tax revenue goes towards healthcare)
-Educational programs about sustainability to encourage consumers

Question 11

Common Access Resources

Answer 11

Non-excludable (consumption can not be prevented, free to all)
Rivalrous (consumption by one individual effects consumption by another)
-Overallocation of resources, decrease in intertemporal efficiency

Question 12

Government Policy for Common Access Resources

Answer 12

-Environmental laws
-Carbon tax
-Direct action (e.g., replanting trees)
-International Agreements (e.g., Kyoto protocol)