3.1.6.1 Types of market failure

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

  True
• Why may government intervention be required when market failure occurs?

  Improve economic efficiency
• Consumers fully understand the benefits of merit goods.

  False
• Order the government interventions to address underprovision of merit goods:

  1️⃣ Subsidies

  2️⃣ Regulations

  3️⃣ Direct provision
• Match the demerit good with its negative externality:

  Alcohol ↔️ Health problems

  Tobacco ↔️ Secondhand smoke

  Unhealthy fast food ↔️ Obesity
• Pollution from manufacturing is an example of a negative externality.


  True
• Public goods are non-rival and non-excludable, leading to under-provision due to free-riding
• Information failure occurs when there is a lack of perfect information for optimal decisions
• Externalities are costs or benefits that affect third parties not involved in a transaction.


  True
• What does market power refer to in the context of market failure?

  Dominance by few firms
• Merit goods provide positive externalities, but consumers may underestimate their benefits
• Subsidies, regulations, and direct provision are government interventions to address the under-provision of merit goods.


  True
• Imperfect information can lead consumers to underestimate the harms of demerit goods.
• Why do negative externalities lead to inefficient market outcomes?

  Costs not in price
• What are some government policies to address negative externalities?

  Taxes and regulations
• Non-rival means one person's consumption does not diminish the good for others.
• Match the type of market failure with an example:

  Negative Externality ↔️ Pollution from factories

  Public Good ↔️ National Defense

  Information Failure ↔️ Underestimation of education benefits
• A monopoly firm uses its market power to charge higher prices and produce less output.
• Market failure refers to a situation where the free market fails to allocate resources
• Match the cause of market failure with its description:

  Public Goods ↔️ Non-rival and non-excludable

  Information Failure ↔️ Lack of perfect information

  Market Power ↔️ Dominance by large firms
• Merit goods provide positive externalities, which are benefits to third parties not reflected in the market price
• What is the socially optimal quantity of merit goods compared to the free market quantity?

  Higher
• Public goods are rival and excludable.

  False
• Negative externalities impose costs on third parties not involved in the transaction
• Order the government policies to address negative externalities:

  1️⃣ Taxes

  2️⃣ Regulations

  3️⃣ Other policies
• Match the characteristic of public goods with its definition:

  Non-rival ↔️ Consumption by one does not diminish others

  Non-excludable ↔️ Impossible to prevent usage

  Under-provision ↔️ Sub-optimal supply
• What is market failure?

  Inefficient resource allocation
• Public goods are non-rival and non-excludable, leading to under-provision
• Government intervention may be needed to improve economic efficiency in cases of market failure.

  True
• How does the quantity of merit goods compare in a free market versus a socially optimal outcome?

  Lower in free market
• What are negative externalities associated with demerit goods?

  Costs to third parties
• Taxes, regulations, and public information campaigns can address the over-provision of demerit goods.


  True
• In the presence of negative externalities, the market produces a higher quantity compared to the socially optimal level.
• Public goods are non-rival and non-excludable, leading to free-riding.

  True
• What is the main reason why public goods are under-provided by the free market?

  Free-riding
• Why is national defense considered a public good?

  Non-rival and non-excludable
• Information failure can lead to the under-consumption of merit goods and the over-consumption of demerit goods.


  True