1.3.1 Market Failure Flashcards
What is market failure?
Where scarce resources are inefficiently allocated due to imperfections in the market mechanism.
Economic and Social welfare are not maximised.
Partial/Complete Market Failure and Missing Markets
> Partial market failure - when a market exists but there is overproduction or underproduction of the good.
Complete market failure - when a market fails to supply any of a good that is demanded.
Missing Markets - a market where the market mechanism fails to supply any of a good.
Types of market failure:
> Externalities - an externality is the cost or benefit a third party receives from an economic transaction. It is the spillover effect of the production/consumption of a good or service.
This leads to over/underproduction of goods and services, meaning resources aren’t allocated efficiently.
Under-provision of public goods - public goods are non-rivalry and non-excludable, and are under-provided by the market due to the free rider problem. The market is unable to ensure enough of these goods are provided.
Information Gaps - it is assumed that consumers and producers have perfect information, allowing them to make rational decisions. In reality this is not usually the case. Therefore economic agents do not always make rational decisions so resources are misallocated and do not maximise welfare.
