3.6.1 Rationale for government intervention

• What is government intervention in the economy aimed at correcting?

  Market failure
• Government intervention may include policies like taxation, subsidies, and regulation
• What is the primary reason for government intervention in the economy?

  Improve economic efficiency
• Negative externalities occur when social costs exceed private costs.
• Match the market failure with its example:

  Externalities ↔️ Factories polluting the environment

  Public Goods ↔️ National defense

  Information Asymmetry ↔️ Used car sales

  Monopoly Power ↔️ Utility companies
• What are the two types of externalities?

  Negative and positive
• What is an example of a positive externality?

  Vaccinations
• Public goods are non-excludable and non-rivalrous.
• Government intervention may include policies like taxation, subsidies, and regulation
• What is a primary example of information asymmetry in the market?

  Used car sales
• Order the following market failures based on their frequency in the economy:

  1️⃣ Externalities

  2️⃣ Public goods

  3️⃣ Information asymmetry

  4️⃣ Monopoly power
• Monopoly power can lead to higher prices and reduced output.
• What are the main types of market failures?

  Externalities, public goods, information asymmetry, monopoly power
• Externalities occur when costs or benefits affect third parties
• Public goods are excludable and rivalrous.

  False
• What is information asymmetry in the context of market failures?

  Unequal access to information
• Monopoly power arises when a single firm dominates the market
• Match the market failure with its example:

  Externalities ↔️ Pollution

  Public Goods ↔️ National defense

  Information Asymmetry ↔️ Used car sales

  Monopoly Power ↔️ Utility companies
• What are the two types of externalities?

  Negative and positive
• Non-excludable and non-rivalrous goods are called public goods
• Order the types of market failures from most common to least common:

  1️⃣ Externalities

  2️⃣ Public Goods

  3️⃣ Information Asymmetry

  4️⃣ Monopoly Power
• What are negative externalities?

  Social costs exceed private costs
• Positive externalities occur when social benefits exceed private benefits
• What is the free-rider problem associated with public goods?

  Under-provision by the market
• Moral hazard is caused by protection from losses
• Why do governments regulate monopolies?

  Prevent market abuse
• Match the regulatory method with its description:

  Price controls ↔️ Sets maximum prices

  Output quotas ↔️ Limits production quantity

  Competition laws ↔️ Prevents anti-competitive mergers

  Natural monopoly regulation ↔️ Oversees essential services
• What is the purpose of government intervention in the economy?

  Correct market failure
• Negative externalities occur when social costs exceed private costs
• Public goods are non-excludable and non-rivalrous.
• What is the primary issue with information asymmetry?

  Unequal access to information
• Public goods are often under-provided by the market due to the free-rider problem
• What is a negative externality?

  Social costs exceed private costs
• Public goods are non-excludable and non-rivalrous, often under-provided by the market due to the free-rider problem
• What are the key characteristics of public goods?

  Non-excludable and non-rivalrous
• Match the example with the type of good:

  Pollution ↔️ Negative externality

  National defense ↔️ Public good

  Vaccinations ↔️ Positive externality
• Externalities lead to efficient resource allocation in the market.

  False
• What is information asymmetry?

  Unequal access to information
• Moral hazard arises when one party takes on more risk because they are protected from losses
• Moral hazard can lead to increased risk-taking and potential fraud.