4.1.8.2 The meaning of market failure

Question 1

Define market failure

Answer 1

When the free market leads to a misallocation of resources in an economy

Question 2

Define complete market failure

Answer 2

When the free market fails to create a market for a good or service (missing market)

Question 3

Define partial market failure

Answer 3

When a market for a good or service exists, but it is consumed or produced in quantities that do not maximise economic welfare

Question 4

Causes of market failure

Answer 4

• Public goods
• Positive and negative externalities
• Merit and demerit goods
• Monopoly and other market imperfections
• Inequalities in the distribution of income and wealth