The table below shows possible sources of market failure in current UK markets. Which combination of example and policy, A, B, C, D or E, is consistent with the possible source of market failure identified?

Question

BlackTom AI · Accepted Answer

Question restatement: The table lists five options (A–E) for potential market failures, together with an example of a market failure and a policy to correct it. The task asks which combination is consistent with the identified source of market failure. Answer given: D.

Option A
- Source of market failure: Public good
- Example of market failure: Education
- Policy to correct market failure: State provision
Analysis: Public goods are typically non-excludable and non-rival, leading to underprovision in a free market. However, labeling Education as a Public good is debatable because education is often considered a merit good or a good with external benefits, and while governments may provide it, education is not a classic pure public good. The pairing here mixes a likely market failure type with a policy (state provision) that could be used for several public-interest goods, but the match to Public good in the source column is not a clean, textbook fit for Education as a public good example. Therefore this combination is not a clear-correct pairing.

Option B
- Source of market failure: Positive consumption externalities
- Example of market failure: Healthcare
- Policy to correct market failure: Minimum price
Analysis: Positive consumption externalities occur when benefits to society exceed private benefits (e.g., vaccination, education). Healthcare can involve positive externalities, but many healthcare markets are heavily regulated and funded publicly for other reasons. The proposed policy to correct it, a Minimum price, is typically used to address negative externalities (to prevent overconsumption) or to support producers, not to internalize positive externalities. Subsidies or public provision, not a minimum price, are standard remedies for positive externalities. Hence this combination is inconsistent.

Option C
- Source of market failure: Merit Good
- Example of market failure: Electricity generation
- Policy to correct market failure: Indirect taxation
Analysis: Merit goods are undervalued by individuals due to imperfect information or external benefits, often justifying subsidies or public provision, not indirect taxation. Electricity generation as the example of market failure is not a typical fit with a merit-good rationale. Indirect taxation is generally used to correct negative externalities (e.g., pollution) or to raise revenue, not to promote merit goods. Therefore this pairing is not coherent.

Option D
- Source of market failure: Negative production externalities
- Example of market failure: Coal-mining
- Policy to correct market failure: Pollution permits
Analysis: Negative production externalities occur when production imposes costs on others (e.g., pollution from coal-mining). A widely taught corrective policy is pollution permits (cap-and-trade) that internalize the external cost by setting a cap and allowing trading of permits. This is a textbook-aligned match: the source (negative production externalities) with the appropriate corrective policy (pollution permits). The example (Coal-mining) is a classic industry associated with pollution externalities. This pairing is consistent with standard economic theory.

Option E
- Source of market failure: none of the above
- (No further analysis since this option asserts none apply)
Analysis: Since Option D provides a coherent and textbook-consistent pairing between the source of market failure and a corrective policy, declaring E as “none of the above” would be incorrect. The existence of a correct match negates E as the right choice.

Summary: Across options, A through C each contain mismatches between the described source of market failure, the example, and the policy to correct it. Option D presents a coherent and standard alignment between a negative production externality (coal-mining) and the policy instrument of pollution permits. Option E is inconsistent with the presence of a valid pairing in D.

The table below shows possible sources of market failure in current UK markets. Which combination of example and policy, A, B, C, D or E, is consistent with the possible source of market failure identified?

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