Market Failure

A shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude nonpayers. Examples: Roads, mail, military.

• Common access resources

• Public goods

• Private goods

• Goods with negative externalities

The following statements are true of government regulations except

• They limit economic freedom
• They seek to limit negative externalities
• They exist to protect consumers
• They are always popular with private businesses

In which of the following situations is market failure least likely to occur? A situation where;

• externalities exist

• many producers compete in the market

• there is a sole producer in market

• there is a very uneven distribution of income and wealth

Which of the following statements is true about externalities?

• When externalities exist, resources are allocated efficiently

• When positive externalities exist, efficiency is improved by taxing the product

• From society's point of view, the output of goods for which a positive externality exists is too low

• The price system overproduces goods with positive externalities

When social costs are greater than private costs, there is a;

• positive externality

• negative externality

• less than socially optimal output

• socially optimal output

Which of the following is a characteristic of a merit good?

• It could be provided by the free market, but not in sufficient quantities

• It is always provided free to consumers

• It tends to generate negative externalities, so governments restrict its consumption

• Once the good has been supplied to one consumer, there is no additional cost in supplying it to others

Which of the following is an example of a public good?

• A lighthouse

• The public transport (bus or train)

• Water to homes

• A coca cola

A free good has:

• An opportunity cost

• No opportunity cost

• Excludability

• Has a price

We may minimize market failure related to a public good by:

• Restricting access to only those who pay

• Excluding those who want to freeride

• Providing the good using taxation revenue

• Depending on the private sector to supply it

TWO ANSWERS ARE CORRECT: Market failure occurs:

• The free market fails to open on time

• Free markets fail efficiently allocate resources

• Price mechanism is NOT low enough for all consumers to afford the good

• Price mechanism fails to account for all costs and benefits associated with consumption of a product