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SingaporeEconomicsQuick questions
Market Failure and Government Intervention
Quick questions on Market failure and externalities explained: O-Level Economics
2short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is external costs lead to over-production?Show answer
An external cost is a harm imposed on third parties. For example, a factory that pollutes a river imposes a cost on the people downstream, who are not buying its product. Because the firm ignores this cost and counts only its own private costs, it produces more than the amount that is best for society. So goods with external costs tend to be over-produced.
What is external benefits lead to under-production?Show answer
An external benefit is a gain enjoyed by third parties. For example, a person who gets vaccinated also protects others from catching the disease. Because the buyer ignores this benefit to others and counts only their own private benefit, less is produced and consumed than is best for society. So goods with external benefits tend to be under-produced.
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