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Which of the following represent forms of market failure where regulation may be a solution?
1.Imperfect competition
2.Social costs or externalities
3.Imperfect informationThe answer is all 3. Can you please explain how?
It is a role of governments to ensure that consumers are charged fair prices for whatever they are buying – that you do not have some people having to pay more than a fair price for goods (because, for example, there is only one company selling the product and they are charging very high prices because there is no competition – this would be market failure.)
All three of the items listed are examples of how consumers could end up suffering and are therefore things that the government might try and stop by regulations (for example, stopping one company having a monopoly over providing a particular product or service).
This is really revision from Paper BT (was Paper 1.1).
Sir, what does social costs and externalities mean in the context of market failure? Imperfect information is related to the efficiency of the market I’m assuming?
No, in the context of this question market failure is not asking about effect of imperfect markets in an economic sense. It is asking whether or not companies are acting in the best interest of the consumers. Social costs and other external things affect consumers and governments can regulate over these.
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