Question 2 Answer

a) Market failure is a situation where the market forces of demand and supply allocate resource inefficiently and there are waste or unutilised resources.


(i) Merit goods contribute to the well being of persons in society and includes education and health. It causes market failure because it is unprofitable to produce so left to free market it will be under-produced leaving persons in need of these essential services.

ii) Public goods are goods that can be consumed by all persons whether or not they pay for the goods. These include street lights, drainage systems, public beaches, parks etc. These goods are essential as well and will be under-produced or not produced at all seeing that the cost of producing it is not backed by payments from all those who will be utilising it. It is unprofitable to produce.

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