Economics Multiple Choice Question – 25 September 2017

Which ONE of the following is an example of market failure?

1. The price of a good falling to clear the market when there is excess supply
2. The over consumption of cigarettes owing to consumers’ lack of information
3. A rise in unemployment caused by an increase in the minimum wage
4. Consumers experiencing diminishing marginal utility
5. Companies increase the price of petrol following in oil prices

The UK government allocated £39 billion to defence in 2012/2013. Explain why defence is a public good:
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This is multiple choice question is suitable for Economics KS5 classes.

The answer is 2 – In economics, a market failure is a situation in which the allocation of goods and services is not efficient. Smoking is a de-merit good. A demerit good is defined as a good which can have a negative impact on the consumer – but these damaging effects may be unknown or ignored by the consumer. Demerit goods also usually have negative externalities – where consumption causes a harmful effect to a third party.The classification of demerit goods is a normative judgment. In defining demerit goods we may assume that people are irrational and make poor choices – often consuming goods which are harmful, degrading or damaging in the long-term. This may be due to poor information or poor decision making. In other words, people may under-estimate the private costs and over-estimate the private benefits. Demerit goods have these two characteristics: a) Harmful, unhealthy to individual consumer & b) have negative externalities i.e. Costs imposed on third parties.

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