Market Failure

Question 1

What is market failure

Answer 1

Market failure is when the free market equilibrium does not lead to a socially optimal allocation of resources such that too much or too little of a good is being produced or consumed

Question 2

What are the four different types of externalities

Answer 2

The four externalities are
Negative production Externalities - when supply is too high and it is overproduced
Positive production Externalities- supply is too low and underproduced
Negative consumption Externalities - demand is too high and is overconsumer
Positive consumption Externalities- demand is too low and underconsumed

Question 3

What are externalities

Answer 3

Externalities are spill over effects that affect individuals who are not directly involved in a particular decision. 3rd parties are affected instead.

Question 4

Equation for social cost

Answer 4

Social cost = private cost + external cost

Question 5

What is the equation for negative production externalities

Answer 5

Question 6

What is information failure

Answer 6

Information failure is when there is a lack of information provided resulting in consumers and producers making decisions that does not maximise welfare

Question 7

Give examples of information failure

Answer 7

Consumers not aware of benefits or harmful effects in products

Question 8

What does information failure result in

Answer 8

Results in the over or underconsumption of goods and services and therefore leading to market failure

Question 9

What is moral hazard

Answer 9

It is a situation when a party gets involved in risky events knowing they are protected against that risk and they won’t incur the cost

Question 10

What are merit goods

Answer 10

Merit goods are goods that if left to the free market will be under consumed

Question 11

What are demerit goods

Answer 11

They are good that If left to free market will be over consumed

Question 12

What are public Goods

Answer 12

Public goods are good that are non rival non excludable

Question 13

What is indirect tax

Answer 13

It is tax that is imposed on producers by the government

Question 14

What is the result of taxation

Answer 14

Taxation will lead to an increase in production costs therefore leading to a decrease in supply and an increase in prices. This will therefore lead to discouragement of producing the product as well as decreasing consumption of the good with the negative externalities and demerit goods