ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Small firms are less efficient than large firms due to diseconomies of scale.
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The existence of free riders will result in the over-production of public goods.
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The social benefits of some private goods exceed the private benefits.
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Markets do not supply merit goods.
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Detailed explanation-1: -Market failures can be corrected through government intervention, such as new laws or taxes, tariffs, subsidies, and trade restrictions.
Detailed explanation-2: -Subsidising goods with high social benefits If goods have a social benefit much greater than private benefit, they are likely to be under-consumed in a free market. People don’t take into account the full social benefit – only their private benefit. This leads to market failure.
Detailed explanation-3: -Market failure occurs due to inefficiency in the allocation of goods and services. A price mechanism fails it will be over or under produced (Stiglitz, 1989). Inefficient allocation of goods and services in an economy are the main reason for Market failure.
Detailed explanation-4: -There are four probable causes of market failures; power abuse (a monopoly or monopsony, the sole buyer of a factor of production), improper or incomplete distribution of information, externalities and public goods.