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Market Failure SAQ

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Questions and Answers

What is an externality?

The external costs or benefits that accrue to other individuals or society as a result of production or consumption.

Give an example of a positive production externality.

Bees owned by a beekeeper pollinate the fruit of a nearby orchard.

What is market failure in the context of a negative production externality?

When a factory releases toxic fumes into the atmosphere, causing poor health for nearby residents, the factory owner incurs no cost but others bear the cost.

Describe a positive consumption externality.

An individual wears a face mask to prevent infecting others. Signup and view all the answers

What is an example of a negative consumption externality?

A non-smoker becomes ill due to passive smoking. Signup and view all the answers

Define market failure.

The lack of incentive an individual or firm may have to guard against risk if they are protected from the consequences. Signup and view all the answers

Give an example of asymmetric information.

Regulation of markets, such as by the Environmental Protection Agency. Signup and view all the answers

How can market-based solutions reduce pollution?

By using taxation to reduce pollution or grants/subsidies to encourage less pollution. Signup and view all the answers

What is a regulatory measure combined with a market-based solution in the tobacco industry?

It is illegal to sell tobacco to under-18s, and there is a high excise duty on tobacco. Signup and view all the answers

What happens in a monopoly regarding market power?

Prices are higher and quantity produced is lower, leading to less choice for consumers. Signup and view all the answers

What is collusion in an oligopolistic market?

It is when firms engage in anti-competitive behavior, such as price-fixing. Signup and view all the answers

Give an example of a public good.

Public footpaths and street lighting. Signup and view all the answers

What does non-excludable mean in the context of public goods?

Once a footpath is provided, it is not possible to exclude individuals from using it. Signup and view all the answers

What does non-rivalry mean in the context of public goods?

One individual's use of a footpath does not take away from another person's use of it. Signup and view all the answers

Why do public goods lead to market failure?

Because they do not get provided by the market due to the inability to make people pay for their use. Signup and view all the answers

How does the government provide public goods?

By using revenue from taxation to provide these goods and services. Signup and view all the answers

What is the role of the Competition and Consumer Protection Commission?

It is one of the regulators to help overcome market failure. Signup and view all the answers

What are the consequences of imperfect information for insurers?

Insurers charge higher premiums for all customers due to the lack of information about individual risk. Signup and view all the answers

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