1.3 Market Failure

Question 1

What is market failure?

Answer 1

Market failure is when there is a misallocation of scarce resources.

Question 2

What happens if an economy works efficiently?

Answer 2

Firms would produce at lowest cost per unit possible (productive efficiency)

Question 3

How would resources be allocated if economy works efficiently?

Answer 3

Resources will be allocated between firms and industries in the most efficient way (allocative efficiency)

Question 4

How does lack of competition cause market failure?

Answer 4

One or two firms may dominate industry

Allow firms to restrict supply so market price rises and firms increase revenue

Consumers don’t get there goods in the quantity they want (allocative efficiency)

Question 5

How does information gaps cause market failure?

Answer 5

Efficient markets consumers and firms make rational decisions but when there is a lack of information irrational decisions are made

Informations gaps can occur on merit and de-merit goods.

Question 6

Missing markets (free rider problem) cause market failure?

Answer 6

Firms will refuse to make goods because people who benefit from consuming those goods can’t be forced to pay.

Example would be public goods

Question 7

How can Absence of property rights can cause market failure?

Answer 7

If there are no controls in free market then resources can be depleted.
If there is piracy occurring from streamed sports

Absence of property rights leads to
Overfishing at unsustainable levels where resources being abused