ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the market mechanism fails to take account of externalities.
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it leads to an increase in the consumption of demerit goods.
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the price elasticity of supply of private goods is high.
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the demand for inferior goods rises as income increases.
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Detailed explanation-1: -Subsidies, and other assistance, can lead to the problem of moral hazard. Taxes on goods and services can raise prices artificially and distort the efficient operation of the market. In addition, taxes on incomes can create a disincentive effect and discourage individuals from working hard.
Detailed explanation-2: -When the government intervenes in markets with external costs, it does so in order to: protect the interests of bystanders. An externality is either an external cost or external benefit that spills over to bystanders.
Detailed explanation-3: -Taxes, subsidies, price controls, regulations, minimum wage legislation, and government bailouts are all examples of different kinds of government intervention in the economy. The government may intervene to prevent a monopoly, to boost a struggling economy, or when poverty is worsening.
Detailed explanation-4: -Externalities pose fundamental economic policy problems when individuals, households, and firms do not internalize the indirect costs of or the benefits from their economic transactions. The resulting wedges between social and private costs or returns lead to inefficient market outcomes.