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Causes & Consequences

Causes & Consequences of Market Failure

  • Market Failure occurs when free market activity leads to suboptimal resource allocation from society's perspective.

The Causes & Consequences of Market Failure

The Causes & Consequences of Market Failure

The document Causes & Consequences is a part of the Year 10 Course Economics for GCSE/IGCSE.
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FAQs on Causes & Consequences

1. What are the main causes of market failure?
Ans. Market failure can occur due to factors such as externalities, public goods, imperfect competition, information asymmetry, and income inequality.
2. How do externalities contribute to market failure?
Ans. Externalities occur when the production or consumption of goods and services affect third parties who are not directly involved in the transaction, leading to market inefficiencies and potential market failure.
3. What are the consequences of market failure on the economy?
Ans. Consequences of market failure can include inefficient allocation of resources, income inequality, environmental degradation, reduced consumer welfare, and potential government intervention to correct market failures.
4. How does imperfect competition lead to market failure?
Ans. Imperfect competition, such as monopolies or oligopolies, can result in higher prices, reduced consumer choice, and inefficient allocation of resources, contributing to market failure.
5. How can information asymmetry impact market failure?
Ans. Information asymmetry occurs when one party in a transaction has more information than the other, leading to potential market distortions, such as adverse selection or moral hazard, which can contribute to market failure.
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