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Questions and Answers
What is one of the main reasons for government intervention in markets?
What is one of the main reasons for government intervention in markets?
How do public goods contribute to market failure?
How do public goods contribute to market failure?
What effect do negative externalities typically have on market quantity?
What effect do negative externalities typically have on market quantity?
What type of externality occurs when a person's consumption negatively impacts others?
What type of externality occurs when a person's consumption negatively impacts others?
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In the context of asymmetric information, what is 'adverse selection'?
In the context of asymmetric information, what is 'adverse selection'?
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Which of the following best describes the concept of moral hazard?
Which of the following best describes the concept of moral hazard?
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What is the relationship between social cost and private cost in the presence of externalities?
What is the relationship between social cost and private cost in the presence of externalities?
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Which of the following is true about imperfect competition?
Which of the following is true about imperfect competition?
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Study Notes
Market Failures
- Occur when market equilibrium is inefficient, leading to government intervention.
- Sources of market failures include:
- Imperfect competition: Producers set prices above marginal costs, leading to underproduction compared to an ideal market.
- Equity, Taxes, and Public Goods: Taxes create a difference between prices paid and received. Public goods (non-rival, non-excludable) are underprovided by the market due to the free-rider problem.
- Externalities: One party's production or consumption impacts another without compensation. Externalities can be positive or negative (e.g., pollution, noise, congestion, education). Markets fail to account for these external costs or benefits.
Externalities
- Defined as the impact of one party's actions on another without compensation.
- Can be positive or negative:
- Negative externalities in production increase social costs beyond private costs.
- Negative consumption externalities increase social costs beyond private costs.
- Positive production externalities increase social benefits beyond private benefits.
- Positive consumption externalities increase social benefits beyond private benefits.
- These cause markets to produce quantities of goods that are not socially desirable.
Social Cost/Benefit
- Social cost/benefit is the sum of private cost/benefit and the cost/benefit of externalities.
Asymmetric Information
- One party possesses more information than another.
- Results in opportunism, where the informed party takes advantage.
- Examples include insurance markets (adverse selection and moral hazard).
Adverse Selection
- Hidden information or unobserved characteristics in a market transaction
- Can lead to market inefficiencies.
Moral Hazard
- Hidden action
- One party's behavior changes after a contract is signed.
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Description
This quiz explores the concepts of market failures and externalities, highlighting their origins and implications on economic efficiency. Learn how imperfect competition, public goods, and externalities can lead to government intervention in markets. Test your knowledge on how these factors affect production and consumption.
