Economic Issues Essay

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Economic Issues Assessment 3 1. Market Failure A condition in which a market does not efficiently allocate resources to achieve the greatest possible consumer satisfaction. The four main market failures are--(1) public good, (2) merit goods, (3) externality, and (4) imperfect information. In each case, a market acting without any government imposed direction, does not direct an efficient amount of our resources into the production, distribution, or consumption of the good. Public Goods Public goods are those goods and services that are consumed collectively, theoretically all members of society will benefit from the provision of these goods and services. Examples of public goods are police service, street lighting and national defense. The government provides these goods through taxation as they feel these products would diminish in a free market. The supply of these goods would diminish as the supply of these goods would not be profitable to the supplier because if one household were to purchase these goods or services then many other households would be able to consume it for free; this is known as the free rider problem. Merit Goods There goods and services are subsidies or provided for free by the government as they would be under consumed in a free market. Merit goods are goods and services such as education and healthcare. If the government did not provide these goods and services then market failure would occur. In a free market these goods and services would be under consumed as many people would not see the social benefits of a good education and good health care. Externalities Externalities occur when one person’s actions affect another person’s wellbeing and the costs and benefits are not reflected in market prices. Negative externalities occur when one person’s actions harm

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