1.3.1 Types of Market Failure

Question 1

What is the main role of price in a market economy

Answer 1

to allocate scarce resources efficently

Question 2

Market Failure exists when

Answer 2

The competitive outcome of market is not efficient (or equitable) from the point of view of the economy as a whole

i.e. resources are not allocated efficently s they could be

Question 3

Why does market failure exist, in general

Answer 3

The benefits that the market grants on individuals/firms carrying out a particular activity divides from the overall benefits to society

Question 4

What are the two types of market failure

Answer 4

Complete market failure

Partial market failure

Question 5

Describe complete market failure

Answer 5

occurs when the market does not supply products at all

This is due to the ‘missing market’ of public goods

Question 6

What is partial market failure

and how does it occur

Answer 6

occurs when the market function/exits, but supplies either the wrong quantity of a products or at the wrong price

negative externalities from production, postive externalities from consumption and information gaps, (monopoly power + immobility and equality)

Question 7

What are property rights and why are they important in terms of market failure

Answer 7

Property rights grant legal control/ownership

For markets to operate efficently, property rights must be protected

E.g. if an asset is unowned, no-one has incentive to protect it

Question 8

Failure to protect property rights may lead to

Answer 8

Tragedy of the Commons

e.g. over use of common land and long term decline in fish stock from over-fishing, lead to long term permant damage to stock of natural resources