3.8.2 - The Meaning of Market Failure Flashcards
What is market failure?
The market mechanism leads to a misallocation of resources in the economy.
Either completely failing to provide a good, or providing the wrong quantity.
What is complete market failure?
A market fails to produce at all, and a ‘missing market’ results.
What is a partial market failure?
A market completes the function, but delivers the wrong amount.
What is a missing market?
There is no market becauses the functions of prices have broken down.
What are the four functions that determine how prices perform?
Signalling
Incentives
Allocation
Rationing
What happens when all four functions of the price mechanism work effectively?
Markets work well.
Market failure is non-existant / trivial.
How does the price mechanism function in the example of pure public goods?
Completely breaks down with complete market failure.
How does an externality such as pollution lead to complete market failure?
Firms and consumers dump their pollution on third parties.
There is no market in which the unwilling consumers of pollution can charge producers for the discomfort which they suffer in the pure market.
The lack of a market means there is no incentive for the polluter to pollute less.
Therefore there is market failure.
When does market failure occur?
The market mechanism leads to a misallocation of resources in the economy or a complete failure to provide a good or service.
