Chapter 16

Question 1

What is market failure?

Answer 1

Where there is a misallocation of resources in the market
e.g
partial market failure - over/underproduction of goods

complete market failure -markets not existing leading to no production

Question 2

What are externalities?

Answer 2

When prices and profits give misleading signals about the state of the market

Question 3

What is “underprovision” of public goods?

Answer 3

The market may underprovide or even fail to provide certain (public good)

Question 4

What are information gaps?

Answer 4

Consumers may not have perfect information and may make under-informed decisions
Asymmetric decisions may occur, where the buyer or seller has more information than the other.