A region's flood defense sirens are upgraded with a new digital broadcast system that alerts all residents simultaneously. However, because residents cannot be excluded from hearing the alerts, no private subscription service can profitably operate, and the service is defunded and ceases operations completely.
Which of the following best classifies and explains this economic outcome?
A partial market failure, because the positive externalities of the flood alert system are not fully internalised by the price mechanism.
A partial market failure, because asymmetric information prevents residents from accurately valuing the alert service.
A complete market failure, because the non-excludable nature of the public good leads to a free-rider problem and a missing market.
A complete market failure, because the provider acts as a natural monopoly and restricts output to maximise profits.
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.