4.1.8.2 the meaning of market failure

Question 1

when does market failure occur?

Answer 1

whenever a market leads to a misallocation of resources in an economy aren’t allocated to the best interests of society

• there could be more output in the form of goods and services if the resources were used in a different way
• economic and social welfare isn’t maximised where there’s market failure

Question 2

what are externalities?

Answer 2

the cost/benefit a third party receives from an economic transaction outside of the market mechanism

ie) the spillover effect of the production / consumption of a good / service

Question 3

what are negative externalities?

Answer 3

• caused by the consumption of demerit good
  like cigs

Question 4

what are positive externalities?

Answer 4

• caused by the consumption of merit goods
  like recycling schemes

Question 5

what are public goods?

Answer 5

non-excludable and non-rivalrous
- they’re under-provided in a free market because of the free-rider problem

Question 6

what is the information gap in terms of market failure?

Answer 6

it’s assumed that consumers and producers have perfect information when making economic decisions

• this is rarely the case though
• imperfect info leads to a misallocation of resources

Question 7

what are monopolies in terms of market failure?

Answer 7

• consumer has very little choice where to buy the goods and services offered by a monopoly
  -> they’re often overcharged
• this leads to the under-consumption of the good/service
  -> therefore there’s a misallocation of resources since consumer needs and wants aren’t fully wet

Question 8

how do inequalities in the distribution of income and wealth lead to market failure?

Answer 8

• there’s an inequitable distribution in income and wealth
• income refers to a flow of money
  -> whilst wealth refers to a stock of assets
• this can lead to negative externalities
  -> such as social unrest

Question 9

what are complete market failure?

Answer 9

when the free market fails to create a market for a good or service
- also referred to as a missing market

Question 10

what is partial market failure?

Answer 10

when a market for a good / service exists but it’s consumed / produced in quantities that don’t maximise economic welfare

ie) resources are misallocated