In a free market economy, market failure occurs when the price mechanism fails to allocate resources efficiently. Which of the following statements correctly explains a cause of this allocative inefficiency?
Positive externalities in consumption lead to a misallocation of resources because the marginal private benefit (MPBMPBMPB) of consumption exceeds the marginal social benefit (MSBMSBMSB).
The free-rider problem associated with public goods arises because these goods are non-rival, meaning one person's consumption does not reduce its availability to others.
Asymmetric information in a market can result in market failure because it leads to adverse selection, causing high-quality goods or services to be underprovided.
Demerit goods are overconsumed in a free market because the marginal social cost (MSCMSCMSC) of consumption is less than the marginal private cost (MPCMPCMPC).
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.