1.3.1- Types Of Market Failure Flashcards
What is market failure?
The failure of the market system to allocate resources efficiently
Why does market failure arise?
The price mechanism hasn’t taken into account all the costs and/or benefits in the production or consumption of the product/service
What is complete market failure?
Occurs when the market doesn’t supply products at all due to a missing market
What is partial market failure?
Occurs when the market functions/exists, but it supplies a wrong quantity of the product or at the wrong price
What are the types of market failure?
-Externalities
-Under-provision of public goods
-Information gaps
What is an externality?
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
What do public goods need to be?
Non-excludable and non-rivalrous
Why are public goods underprovided?
The free rider problem
What does imperfect information lead to?
A misallocation of resources
