Identify the cause of market failure from the extract above.

Two reasons why markets are unwilling to produce public goods are:

1. Uncertain demand: demand for public goods is hard to measure, so private firms cannot be sure the investment will pay off.
2. High upfront costs: public goods such as public transport or defence need large initial investment, and private firms prefer quicker returns.

Externalities are costs or benefits experienced by a third party who was not part of the transaction.

Demerit goods

Unequal income and wealth limit poor people's access to resources, so they cannot take full part in markets. Poor households also have less access to education, giving a less skilled workforce and a less efficient labour market.

Social costs

Social cost is the cost to the producer plus the cost imposed on third parties.

D: subsidy.

A subsidy is a government payment that lowers producers' costs.