first test

• What is market failure?

  When the free market misallocates resources
• What happens to economic and social welfare during market failure?


  It is not maximized
• What are the types of market failure?

  • Externalities
  • Under-provision of public goods
  • Information gaps
• What is an externality?

  Cost or benefit to a third party
• How does an externality affect economic transactions?

  It creates a spill-over effect
• What characterizes public goods?

  Non-excludable and non-rival
• Why are public goods under-provided in a free market?

  Due to the free-rider problem
• What is the free-rider problem?

  People benefit without paying for public goods
• What is assumed about consumers and producers in economic decisions?

  They have perfect information
• What is the consequence of imperfect information in markets?

  It leads to misallocation of resources