3.1.5.2 The meaning of market failure Flashcards
What is market failure?
When resources are inefficiently allocated in a free market.
What is complete market failure?
When the market is missing e.g. commonly it’s pure public goods, such as no street lighting.
What is partial market failure?
There is a market for the good, but when there is over or under consumption e.g. under-consumption of solar powered electricity which has positive externalities.
How can externailities cause market failure?
Some goods/services have negative externailities e.g. diesel petrol. Either externailies in consumption or production this can cause consumer to not buy the good/service as especially more then ever consumers have liking to products that are environmentally friendly etc.
How can asymmetric information (market imperfection) cause market failure and what type of market failure does it cause?
Asymmetric information means consumers and firms don’t have same ratio of information thus some consumers are unaware of the positive externalities of consumption of the good/service. Resulting in the good/service to be under consumed.
How can monopoly cause market failure and what type of market failure does it cause?
There is a serve lack of competition in a monopoly market structure, this causes x-inefficiency, in which firms are neither productively efficient or allocatively efficient, this would cause a increase in prices due to the monopolies low incentive to increase efficient or develop/innovate better or different products to deliver customers wants. Furthermore, monopolies tend abuse their power as they know consumers don’t have alternative firms in which they could buy the same product/good. This cause partial market failure as the market for the goods is under consumed.
