Market Failures

Market failure arises whenever firms

• make a loss

• replace machines with workers

• create externalities

• reduce expenditure on research and development

Market failure results in a misallocation of resources. In some cases, this can be corrected by the government

• restricting the manufacture of goods that generate positive externalities

• Providing public goods

• subsidising all loss-making firms

• placing a tax on merit goods

A government might tax a good that creates negative externalities in order to try to:

• Increase price and consumption of the good to provide firms with extra revenue
•  Make the information avaliable more asymmetric
• Decrease demand for the good and thus increase the consumer surplus
• Decrease consumption of the good and thus reduce deadweight loss

Getting a flu shot is an example of a ________ externality

• Negative
• Neutral
• Positive
• Economic

When a third party member is affected by the interaction of a buyer and seller, we call this

• An externality
• The tragedy of the commons
• consumer surplus
• total welfare

What is the underlying mechanism which explains why a good does not become a private one?

• Tragedy of the Commons
• Negative Externalities
• Positive Externalities
• Free Rider Problem

By-products of production or consumption that impose costs on third parties are known as

• negative externalities
• rival externalities
• positive externalities
• exclusive externalities 

Police protection is an example of a _ good and apples are an example of a _ good. 

• Public; Private
• Private; Public 
• Public; Public
• Private; Private 

What is an example of a negative consumption externality?

• Increased standards of education in schools
• Increased research and development into cancer prevention
• Health impacts for society of passive tobacco smoking
• Environmental Pollution

Under what condition is allocative efficiency achieved?

• Marginal private benefits = marginal social costs

• Marginal social benefits = marginal social costs

• Marginal private benefits > marginal social costs

• Marginal social benefits > marginal social costs