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    Illustration of 4 Types of Market Failure

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    Each instance that follows is an example of one of the four types of market failure (imperfect market structure; the existence of public goods; the presence of external costs and benefits; and imperfect information). In each case, identify the type of market failure and defend your choice briefly.

    a. An auto repair shop convinces you that you need a $2,000 valve job when all you really need is an oil change.

    b. Everyone in a neighborhood would benefit if an empty lot were turned into a park, but no entrepreneur will come forward to finance the transformation.

    c. Someone who lives in an apartment building buys a Gretchen Wilson CD and then blasts it at full volume at 3 A.M.

    d. The only two airlines flying direct between St. Louis and Atlanta make an agreement to raise their prices.

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    Solution Preview

    a) Imperfect information. If I went to several shops I would get an accurate assessment of how much the service to my car should ...

    Solution Summary

    Examples of the four types of market failure, with explanations.

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