ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A government bans the sale of a harmful product to consumers who do not fully understand its health risks and sets minimum standards for information on packaging. Which type of market failure is MOST directly addressed by requiring this information?
The failure addressed is information asymmetry, or imperfect information, where consumers do not know the real risks of the product and so over-consume it. Mandatory information on packaging reduces this gap and helps consumers make better-informed choices.
- AInformation asymmetry or imperfect informationCorrect
- BMonopoly power
- CFactor immobility
- DExcess supply caused by a price floor
Explanation
Consumers lacking knowledge of health risks make poorly informed choices, which is imperfect information. Mandatory labelling aims to reduce this gap. Monopoly power, factor immobility and price floors are not what labelling targets.
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