1.3.1 types of market failure Flashcards
definition of market failure
where you are using the market with the price mechanism (quantity, supply) to allocate resources, this leads to a misallocation of resources
what are the 3 types of market failure?
information gaps
public goods
externalities
why do information gaps cause market failure?
mis-allocation of resources because of the price mechanism
where somebody doesn’t have enough information to make the best decision, they either consume too much of something or too little of something
why do information gaps cause market failure?
where somebody doesn’t have enough information to make the best decision, either consume too much or too little of something
why do public goods cause market failure?
under-provision, some goods and services can’t be enjoyed without the consumer paying e.g. firework display from house
why do externalities cause market failure?
a person/firm doing something but has impacts on 3rd party (positive or negative) outside the transaction
what do all 3 types of market failure have in common?
they use the price mechanism which results in a misallocation of resources
