Summary:
Markets are one way of determining what an economy produces, how it produces, and how the products are allocated. Advocates of free markets claim that this approach results in socially optimal outcomes, yet it is commonly accepted that market failure leads to sub-optimal outcomes.
Select ONE of the drivers of market failure listed below:
- Positive externalities
- Asymmetric information
- Public goods
Write 600 words (+/- 10%) to address the following points:
- Describe what is meant by the chosen term, give an example, and comment on how prevalent this type of market failure is in the economy.
- Describe what is meant by “socially optimal outcomes” according to microeconomic theory
- Discuss how and why, when this type of market failure exists, the market fails to reach the socially optimal outcome
- Use a supply and demand chart to show 1) the market outcome, 2) the socially optimal outcome, and 3) how they differ in terms of quantities and prices when this type of market failure exists
- Discuss what government interventions can be applied to steer the market towards socially preferable outcomes