1a) Why does the market fail in the presence of a public good. Choose 1 answer f

Question

1a) Why does the market fail in the presence of a public good. Choose 1 answer from the list below

I. Overproduced

II. Under produced

III. No private provision

IV. No market transaction takes place

V. Ignore external cost/benefit

b) Identify a solution to the market failure mentioned in (1a) Choose 1 answer from the list below

i. Government provision

ii. Taxation

iii. Subsidy

iv. Screening

v. Signalling

2a) Why does the market fail in the presence of a positive externality. Choose 1 answer from the list below

I. Overproduced

II. Under produced

III. No private provision

IV. No market transaction takes place

V. Ignore external cost/benefit

b) Identify a solution to the market failure mentioned in (2a)

Choose 1 answer from the list below

i. Government provision

ii. Taxation

iii. Subsidy

iv. Screening

v. Signalling

3a) Why does the market fail in the presence of asymmetric information

Choose 1 answer from the list below

I. Overproduced

II. Under produced

III. No private provision

IV. No market transaction takes place

V. Ignore external cost/benefit

b) Identify a solution to the market failure mentioned in (3a)

Choose 1 answer from the list below

i. Government provision

ii. Taxation

iii. Subsidy

iv. Screening

v. Signalling

4a) Define the tragedy of the commons.

b) Why are fish in the ocean an example of a resource that suffers from the tragedy of the commons but cattle grazing in a farmer’s pasture does not suffer from the tragedy of the commons.

Explanation / Answer

1. a) IV. No market transaction takes place

Explanation: Public goods are the goods which are non-excludable (it is not possible to exclude the non-payers from availing services) and non-rivalrous (consumption of the goods by one does not reduce its availability for others). For example, national defense is a public good. There is no market for public goods and that is why market failure takes place.

1. b) i. Government provision

Explanation: There is no market for public goods and that is why market failure takes place. This is the reason private firms cannot produce public goods. Government provision is required to resolve the market failure in case of public goods.

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