making markets work

Question 1

types of market failure

Answer 1

1. Failure to account for externalities e.g. firms polluting rivers
2. non-provision of pure public goods e.g. no army
3. under provision of merit goods and over consumption of demerit goods e.g. too little education
4. inequitable distribution of income and wealth e.g. poor get poorer
5. immobility of factors of production e.g. unemployed unable to fill available jobs
6. imperfect information
7. instability in prices and incomes caused specifically by nature of the market e.g. agricultural products
8. exploitation of a firm by its market power

Question 2

negative of public goods

Answer 2

non-excludable and non rival
underprovided in a free market
missing from the free market
free rider problem

Question 3

positive of public goods

Answer 3

multiple people can consume the good at the same time
benefit doesn’t diminish when others use it

Question 4

negatives of private goods

Answer 4

consumers are excluded based on wealth, age etc
information gaps
misallocation of resources

Question 5

negatives of merit goods

Answer 5

under provision in the market
consumers lack perfect information
consumers under consume goods that benefit them

Question 6

examples of merit goods

Answer 6

health services
education
work/business training programme
environmental improvement schemes
public libraries
charities

Question 7

issues with intervening in merit goods

Answer 7

free rider problem can lead to under investment in training
imperfect information leading to employees being unable to judge quality
credit market imperfections

Question 8

negatives of demerit goods

Answer 8

they are overprovided by the market
produce negative externalities
over consumption of demerit goods lead to market failures
many people don’t understand the true risks with de merit goods

Question 9

how do gov intervene with demerit goods

Answer 9

taxation
regulation
subsidise substitutes

Question 10

why do market fail

Answer 10

environmental change