1.3.1 Types of market failure

• Market failure occurs when the free market does not achieve the most efficient allocation
• Match the type of market failure with its description:

  Externalities ↔️ Costs or benefits affecting third parties

  Public goods ↔️ Non-excludable and non-rival goods

  Information asymmetry ↔️ Unequal information between parties

  Monopoly power ↔️ Single firm dominating the market
• Externalities occur when costs or benefits affect third parties.
• What are the two characteristics of public goods?

  Non-excludable and non-rival
• Monopoly power exists when a single firm dominates the market.
• An example of externalities is pollution from a factory affecting nearby residents' health.
• What is an example of a public good?

  National defense
• Order the following types of market failure based on their descriptions:

  1️⃣ Externalities: Costs or benefits affecting third parties

  2️⃣ Public goods: Non-excludable and non-rival goods

  3️⃣ Information asymmetry: Unequal information between parties

  4️⃣ Monopoly power: Single firm dominating the market
• Externalities involve costs or benefits affecting third parties.
• What type of market failure arises from non-excludable and non-rival goods?

  Public goods
• Match the type of market failure with its characteristic:

  Externalities ↔️ Affects third parties

  Public goods ↔️ Non-excludable and non-rival

  Information asymmetry ↔️ Unequal information between parties

  Monopoly power ↔️ Single firm dominance
• What does market failure occur when the free market fails to achieve?

  Efficient allocation of resources
• Externalities involve costs or benefits affecting third parties
• Public goods are excludable and rival in consumption.

  False
• What is information asymmetry in market failure?

  Unequal information between parties
• Monopoly power arises when a single firm dominates the market
• What are the common types of market failure?

  Externalities, public goods, information asymmetry, monopoly power
• Match the type of market failure with its example:

  Externalities ↔️ Pollution from a factory

  Public goods ↔️ National defense

  Information asymmetry ↔️ Used car market

  Monopoly power ↔️ Utility companies
• Externalities can only result in negative consequences.

  False
• Public goods are non-excludable, meaning no one can be prevented from using them once they are available
• What is an example of information asymmetry?

  Used car market
• Microsoft's dominance in PC operating systems is an example of monopoly power.
• What is a consequence of externalities in market failure?

  Inefficient resource allocation
• Underproduction of public goods is often due to the free-rider problem
• Match the type of market failure with its consequence:

  Information asymmetry ↔️ Adverse selection

  Monopoly power ↔️ Reduced innovation
• Arrange the types of market failure in order from simplest to most complex in terms of analysis:

  1️⃣ Externalities

  2️⃣ Public goods

  3️⃣ Information asymmetry

  4️⃣ Monopoly power
• National defense is an example of a public good provided by the government.
• In the used car market, information asymmetry leads to buyers overpaying for inferior cars
• What is a consequence of monopoly power in utility companies?

  Higher prices
• Market failure leads to a loss of social welfare due to the inefficient allocation of resources
• What is a key consequence of externalities in market failure?

  Inefficient resource allocation
• Public goods are underproduced due to the free-rider problem
• Information asymmetry can lead to adverse selection and moral hazard.
• Match the type of market failure with its consequence:

  Externalities ↔️ Inefficient resource allocation

  Public goods ↔️ Underproduction

  Information asymmetry ↔️ Adverse selection

  Monopoly power ↔️ Higher prices
• What is an example of a negative externality caused by a factory?

  Pollution
• Market failure occurs when the free market does not achieve the most efficient allocation of resources.
• Give an example of a public good mentioned in the study material.

  National defense
• Information asymmetry is common in the used car market.
• Market failure leads to a loss of social welfare due to the inefficient allocation of resources
• What is an example of a government intervention to reduce negative externalities?

  Taxes