What is the primary condition for market failure to occur?
Inefficient resource allocation
Public goods are non-excludable and non-rivalrous.
True
A monopoly occurs when a single firm dominates the market
Match the type of market failure with its definition:
Externalities ↔️ Impacts third parties
Public Goods ↔️ Non-excludable and non-rivalrous
Information Asymmetry ↔️ Unequal information between parties
Monopolies ↔️ Single firm dominates market
Information asymmetry can lead to an imbalance of power between buyers and sellers.
True
Government intervention is always necessary to correct market failure.
False
What is an example of an externality affecting third parties?
Pollution from a factory
A monopoly restricts output to increase prices.
True
What are the two key characteristics of public goods?
Non-excludable and non-rivalrous
Monopolies can restrict output and raise prices above competitive levels.
True
National defense is an example of a public good.
Steps to identify and address market failure
1️⃣ Recognize the type of market failure
2️⃣ Identify the sources of the failure
3️⃣ Analyze the consequences
4️⃣ Develop a solution
Unequal information between buyers and sellers is referred to as information asymmetry.
Match the consequence of market failure with its description:
Inefficient Allocation of Resources ↔️ Loss of societal welfare due to misallocation
Deadweight Loss ↔️ Reduction in total surplus due to inefficiency
Deadweight loss represents a net loss to society as a whole due to inefficient resource allocation.
True
Market failure can lead to unfair distribution of goods, known as equity issues.
Match the type of market failure with its example:
Externality ↔️ Pollution from a factory
Public Good ↔️ Street lighting
Information Asymmetry ↔️ Used car sales
Monopoly ↔️ Utility company with no competitors
Why is national defense considered a public good?
Non-excludable and non-rivalrous
An example of a negative externality is pollution
What is information asymmetry in the context of market failure?
Unequal information between parties
Government intervention can always improve market efficiency.
False
Public goods are non-excludable, meaning everyone can access
What is an example of a monopoly in market failure?
A sole utility provider
Arrange the following sources of market failure in a logical sequence:
1️⃣ Externalities
2️⃣ Public Goods
3️⃣ Information Asymmetry
4️⃣ Monopolies
Information asymmetry is common in used car sales
What are the key causes of market failure?
Externalities, public goods, monopolies, information asymmetry
Information asymmetry occurs when one party in a transaction has more information
What is an externality in the context of market failure?
Impact on third parties
Match the type of market failure with its example:
Monopoly ↔️ Utility company with no competitors
Externality ↔️ Pollution from a factory
Public Good ↔️ Street lighting
Information Asymmetry ↔️ Used car sales
Pollution from a factory harming nearby residents is an example of a negative externality.
True
What is one characteristic of public goods that makes them difficult for markets to provide efficiently?
Non-excludable
How do monopolies lead to market failure?
Restrict output and raise prices
Inefficient allocation of resources results in a loss of societal welfare.
What does deadweight loss measure in the context of market failure?
Reduction in total surplus
Government intervention is sometimes necessary to address equity issues caused by market failure.
True
Congestion caused by individual drivers is an example of a negative externality.
In insurance markets, insurers often have less information about an individual's risk profile than the individual themselves, leading to information asymmetry.