4. The study of market failures comprises a large part of the microeconomic lite

Question

4. The study of market failures comprises a large part of the microeconomic literature. To show that you understand the concept of market failure, match each of the right hand terms with one left hand term. The idea here is that the right hand terms are possible or likely results of certain market failures that are listed in the left hand column. Carefully explain the relationship between each of the terms you have matched up. asymmetric information negative externalities barriers to entry positive externalities product differentiation monopolistic competition too many overgrown lawns air pollution adverse selection monopoly

Explanation / Answer

Asymmetric information -Adverse selection

Adverse selection refers to situations where seller poses complete knowledge of his goods where consumers do not pose such information this may affect the consumer interest in market

Negative externalities - Air Pollution

Air pollution results in problem of negative externalities, for example, Paper Industries here benefits received by the society is lesser than cost

Barriers to entry-Monopoly

Under monopoly, market firm fixes price greater MC cost which society is not much benefited this is due to entry of new firm is restricted it leads to market failure in allocation of resource

Positive externalities-Too many overgrown lawns

More greenery is benefits to the society here society gets more benefits than its cost

Product Differentiation-Monopolistic competitions

Product differentiation is common feature of monopolistic competition under this type of market consumer find difficult to compare feature each other product and this leads to imperfect knowledge in the market

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