Question

Match each scenario with the corresponding market failure:

A. Externality B. Public Good C. Natural Monopoly

____2. An additional listener tuning into WKAL local radio does not affect the quality of signal other users receive; moreover, once WKAL broadcast, the station is unable to block listeners from receiving their signal.

____3. Both treatment and delivery of drinking water is very scale intensive. Having more than one firm provide service would result in higher costs than that which could be achieved by a sole provider.

____4. Driving his Clunker, Sam produces exhausts which combined with summer heat creates ozone, a respiratory irritant. The ozone causes Jimmy to suffer asthma attacks, but SAm does not take into the account the effects of his emissions on Jimmy's asthma when deciding how much to drive.

Answer 1

The explanation to each of the market failures and the corresponding result and its effects is as explained.

A) Externality: -

An externality is said to take place, when as a result of the production or consumption process, other people get effected positively or negatively. For example, when we produce a chemical product that pollutes the rivers nearby, the negative externality is the pollution of fresh river water itself.

This is best explained by option 4) wherein due to the acts of Sam, Jimmy suffers from asthma attacks respectively. This externality is negative in nature wherein, due to the actions of Sam, Jimmy gets negatively affected.

B) Public Good: -

A public good, is one which has equal access to all and is provided to everyone at large even though some people may not pay the cost for it. For example, when residential complexes are built, parks are built in the same as well. This may be accessed by all members of the society and by outsiders as well who never paid for the same, but have equal access.

Similarly, the radio service offers free service to one and all and is unable to block any listener from listening to the broadcast which is why it is a public good in nature. This is best explained by option 2)

C) Natural Monopoly: -

A natural monopoly comes into existence, when the cost of entering a market type is extremely high for others which may result in inefficient outcomes for the entire market place. Usually, this is present in public utilities which are supplied by the government. As no other private party has the required capital to enter and maintain the same level of quality in these market types, they are called as natural monopolies in which only one participant is present due to heavy restriction on entry in the market place.

This is best explained by option 3)

Correct Answers: -

Externality- Option 4)

Public Good-Option 2)

Natural Monopoly Option 3)

Please feel free to ask your doubts in the comments section if any.