1.3 - Market Failure Flashcards
Why is a market in equilibrium described as being ‘allocatively efficient’
The ‘right’ amount of resources have been allocated to the market as there are no shortages or surpluses. It is also believed that social welfare is maximised as PS and CS are at the maximum they can be (the size of the 2 triangles cannot be any larger than when output is q*).
What happens to social welfare if more / less is produced?
Less: if output stops before q* then social welfare falls by triangle XYZ as consumers would have been willing to pay more than it cost the firms to supply the units.
More: if output goes beyond q* then social welfare is also reduced by triange XYZ as it costs suppliers more to make these extra units than consumers are willing to pay for them.
Why do some economists argue that markets should then be left to themselves?
Free market economists then believe that how resources are allocated, how much output can be produced and what prices should be charged must be left to the free market - laissez faire view - as this produces a socially optimal outcome.
3 types of market failure.
Where none is produced (missing market) - public goods.
Where too little is produced - merit goods.
Where too much is produced - de-merit goods.
