Question

.Academic studies suggest that the amount people tip at restaurants is only slightly related to the quality of service, and that tips are poor measures of how happy people are with their service. Is this an example of market failure? CHOOSE ONE:
No, market failure only exists when a company produces too little of a good or service. The organizations are providing the service; consumers just choose not to tip the workers accordingly.

Yes the consumers tend to tip based on thier mood at the time or whether they have enough money

No if this were a form of market failure, the government would stop allowing people to tip individuals for thier services.

Yes this could be considered a form of market failure. If consumers and markets were rational tips would be based on the quality of service.

Answer 1

There are various forms of market failure, though it is commonly defined in economics as a situation where the distribution of goods and service are conducted in an inefficient manner.

In the case illustrated in the question, the form of market failure that is taking place occurs in the nature of the exchange, which is due to bounded rationality. It is defined as condition commonly occurring in individuals where decision-making is based on making a satisfactory solution instead of an optimal one – this leads to irrational behaviors. A good example is the tipping behavior provided in the question.

Thus, the answer to the question is (D) Yes this could be considered a form of market failure. If consumers and markets were rational tips would be based on the quality of service.