Types Of Market Failure

Question 1

The 5 main types of Market failure
(miss allocation of resources)

Answer 1

1)Merit Good-people
As:people underestimate the benefits of the Good
2)De-Merit Good-People
As:people underestimate the costs of the Good

3)postive externalities
As:gives benefit to third party
4)Negative externalities
As:Imposes a cost On a third party

5)Monopoly power
As:the firm controls the market/can set higher prices

Question 2

3 extra types of market failure(for extra good knowledge)

Answer 2

1)Information failure
2)Unequal distribution in resources
3)Moral hazard-wanting for others to take a risk to then change stuff

Question 3

Explanation for why Merit goods are a type of Market failure(chain of reasoning)

Answer 3

Under consumed Due to Imperfect information about its benefits.
THEREFORE THERE IS INFO failure meaning there is a missloacation of resources

Question 4

Explanation for How Positive Externatlies are a type of Market failure(chain of reasoning)

Answer 4

Firms or consumers do not think about/do not care about the benefit to society /are only focused on self interest,.
this leads: to an under consumption or under provision of the market good
which results in a misallocation of resources.

Question 5

How do merit and de-merit goods lead to market failure?

Answer 5

Imperfect information (information failure or asymmetric information)

this leads:buyers to, consume below(merit) or above(de-Merit) the social optimum (what society wants)

Leading to: less of the positive/negatve externality being given off

resulting in: a misallocation of resources

Question 6

How can common access resources lead to/be a type of of market failure?

Answer 6

Tragedy of the commons:

-private produces act upon their own self interest/
-exploit common access resources
which leads to: depletion of the resources

giving a negative externality off (loss of income)

Leads to:misallocation of resources

Question 7

How do negative externalities lead to market failure?

Answer 7

The market will allocate resources at the private optimum(what selfish people want)

however: society would like to operate at the social optimum
Instead: we focus on self interest and ignore society’s cost/benefit

which leads:to a misallocation of resources

Question 8

What is COMMON ACCES RESOURCES

Answer 8

Resources that aren’t owned by anyone
-Don’t have a price
-available to everyone(non rival or excludable)

Question 9

Examples of common access resources

Answer 9

Seas/forest/atmosphere/public land
(basically nature)

Question 10

What is the tragedy of the Commons

Answer 10

An individual/firm consumes a resource
At the expense of society

Question 11

How does immobility of factors of Production lead to market failure(types of market failure)

Answer 11

Resource Misallocation:
When factors of production are immobile they cannot easily move to where they are most needed/where they are most productive.

This can result in resources being allocated inefficiently,