In: Economics
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Identify the type of market failure. Is it a problem of negative externalities, positive externalities, public goods, or common resources? Could government action improve economic efficiency? Clearly explain your position.
Ans: Market Failure: It refers to the state where allocation of resources are inefficient in the market.
Types of Market Failure:
1) Externalities
2) Monopoly Privileges
3) Information asymmetries
4) Factor Immobility
It is a problem of negative externalities because negative externalities refer to the situation where economic transaction i.e. production or consumption imposes the negative impact on external party.
Example of Negative Externalities:
Improving economic efficiency: Governement can improve economis efficiency by following ways:
1) By providing infrastructure that permits markets to function properly.
2) Design laws in such a way to prevent business from making agreements or engaging in other behavior that limits competition and harms consumers.
3) By stepping in when markets are not working properly.