Market Failure & Govt intervention

Efficiency in markets occurs when the social optimum is achieved, where MPB = MPC, maximising society's welfare

• True

• False

Answer explanation

It should be MSB= MSC

Efficient allocation may

not result in equitable outcomes. An efficient allocation may not be a (a)   (4 letters) allocation

Answer explanation

Equity could be defined as fairness in the distribution of economic welfare.

An efficient allocation may not be a fair allocation.

Which of the following statement is correct?

• Public Transport is a public good

• Related sources of market failure for merit goods are positive externalities and inequity

• Occupational immobility of labour is a source of market failure

• Public goods are goods that are rivarlrous and excludable in consumption

Answer explanation

Public Goods are goods that are non-rivalrous and non excludable in consumption. Public transport is NOT a public good.

Inequity is NOT a source of market failure. A market can be efficient but inequitable.

Immobility of labour such as occupational immobility is a source of market failure. Resources (i.e. labour) cannot respond to incentives to produce the goods.

Select answers that apply: Why do govt intervene in the context of university education?

• It is a Public good

• Positive Externalities

• Imperfect Information

• Inequity

Illustrate how existence of positive externality in consumption of a good results in market failure.

Answer explanation

check for

1. Correct axis

2. MSB > MPB due to existence of MEB

3. correct indication of Qm and Qs

To show consequences of market failure:

1. Qm<Qs (underconsumption)

2. deadweight loss of area ABC

Complete the diagram to show how subsidy to producers would help to underconsumption of university education.

Answer explanation

The yellow line shows MPC-subsidy. This shows how subidy (=MEB at Qs) lowers the unit cost of production and hence increase equilibrium quantity, Qm towards Qs.

What one is a correct explanation for underconsumption of university education due to imperfect information?

• MPBperceived > MPBactual

• MPBperceived < MPBactual

• MSBperceived > MSBactual

• MSBperceived < MSBactual

Which of the following is not applicable to the context of used car market?

• Moral Hazard

• Asymmetric Information

• Adverse selection

• Information failure

Answer explanation

Broadly speaking, there is information failure in the used car market. This is due to asymmetric information where sellers have more information than buyers.

It is a form of adverse selection when a good is mainly bought or sold by a certain segment of the more informed party that would harm the uninformed party.

It cannot be moral hazard, which exists when one party has more information than the other. Once they made a transaction, the more informed party changes his behaviour in order to benefit as the costs are borne by another party.

Which of the following measure is considered as signalling to counter asymmetric information?

• Lemon Law

• Universal Coverage

• Online Reviews

• Warranty of a product

Answer explanation

In the product market when a firm offers a warranty for a product, it signals to consumers that the product is of good quality.

I am ___% familiar with this topic on market failure now. (no mark for this question. Be truthful!)

• 0-25
  
  

• 26-50
  
  

• 51-75

• 76-100