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Market Failure

The reasons why markets fail

Lack of provision of public goods

Public goods are defined by two characteristics: nonexcludability and nonrivalrous.
Many are nonrejectable ­ it is not possible to choose not to consume the good.
Other goods possess some, but not all, characteristics of public goods and…

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quantity OQ, where the joint price which the two individuals are prepared to pay equals the
marginal cost.

The issue would be to get people to reveal what they are willing to pay for a particular quantity
of defence. The individual would understate their true valuation as this is in…

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Consumption of demerit goods lead to regret in the future
Good reason for high taxes/negative advertising as it appears there are no longterm
effects
Therefore, there is an information gap







The government could increase output to the socially efficient level by a per unit
subsidy, increasing supply to S1. It…

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External costs from production such as pollution may cause marginal social cost to
diverge from marginal private cost.
The demand curve reflects MSB because there are no external benefits. As there are
external costs, the MSC is greater than the MPC. Socially efficient outcome is at Q1, but
the free…

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considering fairness in the distribution of income and wealth and in the outcome of
economic activities. Greater equity can be achieved through the taxation system.
Horizontal equity means that people with a similar ability to pay abilities should pay the
same amount, hence, it makes sure that the tax system…

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were unrealistic to potential customers who had insufficient information to make an
informed choice.
`Lemon market' the average value of a product tends to go down, even for those
products of perfect quality.
Example of this is the secondhand car market, where there are good cars and
defective cars, called…

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