Market Failure

Question 1

Name 3 causes of market failure

Answer 1

-externalities
-information failure
-tragedy of commons

Question 2

How does information cause market failure

Answer 2

-when people have inaccurate or incomplete information
-this affects the willingness of both consumer and producers
-consumers faced with too much info so they cant make rational decisions
-dont have the time to make the decision bounded rationality
-Not realise harm or benefits
-demand will be too high or low

Question 3

Define market failure

Answer 3

If left up to the market at the equilibrium there will be a misallocation of resources
This wile lead to over consumption / production or under consumption / production

Question 4

How does externalities cause market failure

Answer 4

Firms want to maximise profits and consumers want to maximise utility therefore each party does not take into account what the externalities of consuming or producing of a product will be on society.

Question 5

How does tragedy of commons cause market failure

Answer 5

As no one owns the resource it can be overproduced and exploited until the scarce resource has been completely used and depleted