1.3.1 (Market Failure)

Question 1

What is Market Failure?

Answer 1

• Market failure occurs when the market fails to allocate scarce resources efficiently, causing a loss in social welfare loss
• 3 Main Types of Market Failure exist

Question 2

What are Externalities?

Answer 2

• An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism
• The spillover effect of the production or consumption of a good or service
• Leads to over or under production of goods which leads to a lack of efficient allocation of resources

Question 3

What are under-provision of Public Goods?

Answer 3

• Public goods are non-rivalry and non-excludable therefore if under provided by the private sector there could be the free rider problem
• The market is unable to ensure enough of these goods are provided

Question 4

What are Information Gaps?

Answer 4

• Firms are assumed to have perfect information on their cost and revenue curves and governments are assumed to know the full cost and benefit of each decision
• This is not the case and economic agents do not always make rational decisions and resources are not allocated to maximise welfare