FINA 431 FINANCIAL MANAGEMENT IN THE PUBLIC SECTOR Latest Verified Review 2023 Practice Questions and Answers for Exam Preparation, 100% Correct with Explanations, Highly Recommended, Download to Score A+

FINA 431 FINANCIAL MANAGEMENT IN THE PUBLIC SECTOR Latest Verified Review 2023 Practice Questions and Answers for Exam Preparation, 100% Correct with Explanations, Highly Recommended, Download to Score A+ QUESTION ONE Market failure occurs when there is an inefficient allocation of goods and services in a market. That is, there exists another outcome where market participants' overall gains from the new outcome outweigh their losses (even if some participants lose under the new arrangement). Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view. Explain any four types of potential market failure including how they arise. (12 marks) Introduction Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole. Markets can fail because of: 1. Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost. 2. Positive (or beneficial) externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit 3. Imperfect information means merit goods are under-produced while demerit goods are over-produced or over-consumed 4. The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people’s needs and wants 5. Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition 6. Factor immobility causes unemployment hence productive inefficiency 7. Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change