4.1.8.2 Flashcards
To be the best.
Market Failure
When a market leads to a misallocation of resources, meaning resources aren’t allocated in a way that maximises social welfare.
Misallocation of resources
When goods and services are over/ underproduced compared to the socially optimal level, leading to inefficiency and reduced overall welfare.
Complete market failure
When a market for a public good doesn’t exist at all for a good/ service e.g national defence.
Partial Market Failure
When a market exists but operates inefficiently, leading to resource misallocation (e.g. overproduction of demerit goods like cigarettes.)
How do public goods lead to market failure?
They are non-rivalrous + non-excludable, so people can benefit from them without paying. This results in under/ no production of such goods in a free market.
How do positive externalities cause market failure?
When external benefits (e.g. vaccinations) aren’t fully captured by the market, leading to underproduction .
How do negative externalities cause market failure?
When production / consumption imposes external costs on third parties (e.g. pollution), leading to overproduction.
How do merit goods lead to market failure?
Under-consumed due to lack of awareness of benefits (e.g. healthcare).
How do demerit goods lead to market failure?
Over-consumed due to lack of awareness of harms (e.g. cigarettes).
How do monopolies lead to market failure?
They restrict output and raise prices, leading to allocative inefficiency.
How do imperfections lead to market failure?
They distort efficient price allocation, like lack of competition or price controls.
How do inequalities in income and wealth to market failure?
Significant inequalities can result in a lack of access to essential goods and services, reducing overall societal welfare and efficiency.
