1.3.1 Types of market failure

Question 1

Market failure

Answer 1

Where the free market allocates resources inefficiently

Question 2

What are the two types of market failure?

Answer 2

• Total market failure: Where no market exists.
• Partial market failure: Where the market functions but either the price or quantity supplied of the good/service is wrong.

Question 3

What is an example of total market failure?

Answer 3

National defence.

There is no market which allocates it, therefore meaning governments need to intervene in the market and provide it.

Question 4

What is an example of partial market failure?

Answer 4

Healthcare.

If left completely to market forces, then some people wouldn’t be able to afford the treatment they needed. As a result, governments might intervene and provide free health care.

Question 5

What are the main reasons for market failure?

Answer 5

• Under-provision of public goods.
• Information gaps.
• Externalities (positive and negative).