A private engineering consortium investigates the viability of constructing a tidal surge barrier to protect a coastal region from flooding. Due to the non-excludable nature of flood defense, the consortium realizes it cannot prevent non-paying coastal properties from benefiting, leading to a situation where no private firm is willing to supply the barrier.
Which of the following best describes this situation?
A partial market failure because the positive externalities of flood defense are not fully internalized by the private sector.
A complete market failure arising from the free-rider problem associated with a public good.
A complete market failure caused by asymmetric information between the developers and local property owners.
A partial market failure due to the underprovision of a merit good by the free market.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.