market failure

Question 1

market failure is…?

Answer 1

when the free market left alone, fails to deliver an efficient allocation of resources

Question 2

what is partial market failure?

Answer 2

where a market exists but contributes to the misallocation of resources

Question 3

complete market failure result in…?

Answer 3

a missing market

Question 4

what is a missing market?

Answer 4

a situation where there is no market because the functions of prices have broken down

Question 5

causes of market failure…?

Answer 5

-positive and negative externalities
-merit and demerit goods
-public goods
-monopoly and other market imperfections
-inequalities in the distribution of income and wealth
-factor immobility causing unemployment
-imperfect information

Question 6

what are externalities?

Answer 6

costs or benefits that spill over to third parties external to a market transaction

Question 7

what are positive externalities?

Answer 7

a positive spill over effect to third parties of a market transaction
social benefits exceed private benefits

Question 8

what are negative externalities?

Answer 8

a negative spill over effect to third parties of a market transaction
social costs exceed private costs

Question 9

what are merit goods?

Answer 9

a good that would be under consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption
(ought to be subsidised or provided free at the point of use and funded by the government)

Answer 10

-that everyone should have them regardless of whether an individual wants them
-individuals may not act in interest because of imperfect info

Question 11

what are demerit goods?

Answer 11

consumers may be unaware of the negative externalities that these goods create
(they have imperfect info about long term damage to their own health)
(they should be taxed)