ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The economy doesn’t want too much of a good thing
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Cost/benefits of goods/services aren’t allocated only to those who produce or consume the product
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Eternalities only exist in monopolies, which is a sign of a market failure
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None of the above
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Detailed explanation-1: -Externalities lead to market failure because a product or service’s price equilibrium does not accurately reflect the true costs and benefits of that product or service.
Detailed explanation-2: -When externalities are present, marker prices do not reflect all the social costs or benefits of the activity. True, The personal income tax is based on the benefits received principle of taxation.
Detailed explanation-3: -All externalities are market failures, but not all market failures are externalities. (A market failure occurs whenever resources are allocated inefficiently in a market. Externalities are only one type of market failure.)
Detailed explanation-4: -Summary: Public goods constitute a market failure because: 1) lack of enforceable property rights (nonexcludable), 2) not a divisible homogenous products (nonrival). The private market has no incentive to provide such goods, hence market failure.