They’re 3 sources of market failure: 1. information asymmetry 2. Externalities 3. public goods Identify an...

They’re 3 sources of market failure:

1. information asymmetry

2. Externalities

3. public goods

Identify an ex.ample of each of these market failures and explain why it is a market failure?( specifically in technology/education/health/ financial sectar)

Then give 3 examples:

Solutions

Expert Solution

Market failure exists when demand and supply forces do not deliver efficient result, or either demand or supply does not reflect true demand or true cost. External benefits or costs are not considered by market forces, thus inefficient outcomes are resulted.

1) Information Asymmetry means unequal distribution of information among the participating parties. One party tends to have more information relative to other. For example, individual is well aware of his health history, while insurance firm has minimum information about it. Thus, high risky individuals tend to go for insurance and insurance premium shoots up. Thus, less risky individual are left out. Here, demand and supply force do not work efficiently due to unequal distribution of information. it is market failure.

2) Externalities: Externalities are positive or negative impacts of consumption or production which are faced by third party. Third party is outside the market mechanism. Thus, market mechanism does not cover it. Affected party is neither compensated for negative externalities and nor liable to pay compensation for having positive externalities. Education is prime example of positive externality.

3) Public good: Any good that satisfies two conditions viz non-rival and non-exclusion is called public good. Public good can not be supplied through market mechanism. People tend to understand their demand for public good, so inefficient outcomes are witnessed. Thus, market does not provide efficient result.

Rahul Sunny answered 1 year ago

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