20) Types of market failure

Question 1

What is market failure?

Answer 1

Market failure occurs when the allocation of resources by the market is sub-optimal

Question 2

What is optimal allocative efficiency?

Answer 2

When consumer surplus + Producer surplus is maximised

Question 3

What types of market failure exist?

Answer 3

Partial - where there is stuff made, but the P/Q is judged to be too high or too low
Complete (missing market) - Where Q is zero, so P doesn’t exist

Question 4

What are the 8 reasons why a market might fail?

Answer 4

1) The existence of externalities
2) Non-provision of public goods
3) Information gaps & asymmetric information
4) Lack of competition in the market
5) Under-provision of merit goods
6) Over-provision of demerit goods
7) Factor immobility
8) Inequality of income and wealth