Question

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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.

Answer 1

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:

• Impact of smoking on non-smokers
• Air pollution from road use and traffic congestions.

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.