2.8 MARKET FAILURE

Question 1

what is market failure

Answer 1

when the price mechanism fails to allocate scarce resources efficiently OR when the operation of market forces lead to a net social welfare loss

Question 2

when does market failure exist

Answer 2

when the competitive outcome of markets is not satisfactory from the point of view of society

Question 3

what is complete market failure

Answer 3

occurs when the market simply does not supply products at all (we see ‘missing markets’)

Question 4

what is partial market failure

Answer 4

occurs when the market does actually function but it produces either the wrong quantity or a product at the wrong price

Question 5

market failure occurs where

Answer 5

• existence of external costs and benefits
• knowledge is not perfect (information failure and ignorance allows merit goods to be under produced and demerit to be over )
• market power : monopoly suppliers
• factor immobility causes unemployment
• inequality exists : unacceptable distribution of income
• goods would not be provided in sufficient quantities