1.3.1 Types of market failure

Question 1

what is market failure?

Answer 1

Market failure occurs when the price mechanism in a free market leads to an inefficient allocation of resources, causing a net welfare loss. (the market fails in allocating scarce resources)

Question 2

what does the price mechanism in a free market determine and what does this indicate?

Answer 2

In a free market, the price mechanism determines the most efficient allocation of scarce resources in response to the competing wants and needs in the marketplace.
- indicates the free market often works very well

Question 3

how can the allocation of resources of g/s be described?

Answer 3

• There is either over-provision (supply) or under-provision of the g/s & therefore an over-allocation or under-allocation of the resources (fop) used to make these g/s
• From society’s pov there is a lack of allocative efficiency

Question 4

what are scare resources?

Answer 4

fop (cell)

Question 5

what does the free market sometimes lead to?

Answer 5

the free market sometimes leads to Market Failure, where there is a less than optimum allocation of resources from the point of view of society.

Question 6

new welfare loss

Answer 6

the lost welfare as a result of too much or too little production and consumption of a good or resource

Question 7

the role of markets

Answer 7

allocate scare resources

Question 8

the two ways markets fail?

Answer 8

• complete market failure
• partial market failure

Question 9

complete market failure

Answer 9

when a market fails to supply any of a good which is demanded, creating a missing market.

Question 10

missing market

Answer 10

a market where the market mechanism fails to supply any of a good

Question 11

partial market failure

Answer 11

when a market for a good exists but there is overproduction or underproduction of the good.

Question 12

the three types of market failure?

Answer 12

• externalities
• under-provision of public goods
• information gaps