3.1.6.3 Government intervention

• Market failure occurs when the free market fails to allocate resources efficiently
• Match the type of market failure with its definition:

  Public Goods ↔️ Non-rival and non-excludable goods

  Information Failure ↔️ Lack of perfect information

  Market Power ↔️ Dominance by a few large firms
• Government intervention is sometimes necessary to improve economic efficiency and social welfare

  True
• Public goods are non-rival, meaning one person's consumption does not reduce availability for others
• Match the source of market failure with its characteristic:

  Externalities ↔️ Divergence between private and social costs

  Public Goods ↔️ Non-rival and non-excludable

  Market Power ↔️ Dominance by large firms
• Public goods are under-provided by the free market because they are non-excludable


  True
• Match the source of market failure with its effect:

  Externalities ↔️ Affect third parties

  Public Goods ↔️ Under-provision by the market

  Market Power ↔️ Restricted output and higher prices
• Taxes can reduce negative externalities but may also distort markets


  True
• Match the government intervention with its example:

  Regulation ↔️ Environmental standards for factories

  Taxation ↔️ Carbon tax on petrol

  Subsidies ↔️ Financial aid for renewable energy
• Environmental regulations on factories aim to limit negative externalities
• Subsidies encourage positive externalities but can create inefficiencies

  True
• Match the cause of market failure with its definition:

  Externalities ↔️ Costs or benefits affecting third parties

  Public Goods ↔️ Non-rival and non-excludable goods

  Information Failure ↔️ Lack of perfect information

  Market Power ↔️ Dominance by a few large firms
• What does it mean for a good to be non-rival?

  Consumption does not reduce availability
• Government intervention aims to correct market failures and improve social welfare
• What is a potential drawback of regulation as a government intervention?

  Increased compliance costs
• Evaluating government intervention requires considering both efficiency and equity
• Public provision may be inefficient but ensures access to essential goods

  True
• Externalities are costs or benefits that affect third parties not involved in a market transaction


  True
• Information failure leads to suboptimal decisions due to a lack of perfect information
• Arrange the sources of market failure in order of their impact on market efficiency:

  1️⃣ Externalities

  2️⃣ Public Goods

  3️⃣ Information Failure

  4️⃣ Market Power
• Market power allows firms to restrict output and raise prices above competitive levels


  True
• Market failure occurs when the free market fails to allocate resources efficiently
• Information asymmetries can lead to suboptimal decisions by consumers and producers

  True
• Government intervention aims to correct market failures and improve social welfare
• Regulations imposed by the government aim to limit negative externalities
• Arrange the government intervention types in order of their primary goal:

  1️⃣ Regulation: Limit negative externalities

  2️⃣ Taxation: Reduce negative externalities

  3️⃣ Subsidies: Encourage positive externalities
• What is an example of a tax used to reduce negative externalities?

  Carbon tax on petrol
• Market failure occurs when the free market fails to allocate resources
• Government intervention may be necessary to improve economic efficiency
• Information asymmetries can lead to market failure

  True
• Match the government intervention with its example:

  Taxes ↔️ Carbon tax on petrol

  Subsidies ↔️ Subsidies for renewable energy

  Regulations ↔️ Environmental regulations on factories

  Public Provision ↔️ National healthcare services
• Taxation can reduce negative externalities but may be regressive


  True
• What is a potential drawback of subsidies for renewable energy?

  Costly for the government
• Effectiveness of government intervention depends on balancing efficiency and equity