ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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their consumption results in positive externalities.
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their production results in negative production externalities.
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they are over-consumed in a free market.
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they are under-consumed when left to free market forces.
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Detailed explanation-1: -How do demerit goods cause market failure? The market failure created in these types of goods is caused by a divergence between the marginal private benefit and the marginal social benefit curves. This is because when individuals consume demerit goods it releases negative consumption externalities onto society.
Detailed explanation-2: -In economics, a demerit good is “a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves"; it could be over-consumed if left to market forces.
Detailed explanation-3: -Definition: Market failure, from Investopedia. Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group.
Detailed explanation-4: -The main types of market failure include asymmetric information, concentrated market power, public goods and externalities.
Detailed explanation-5: -Negative externalities This is what is making the cost of production of the goods so low, which means that their price will also be lower. However, this is a market failure as there will be an excessive production of goods.