4.1.8.2 - The Meaning of Market Failure Flashcards
What is market failure?
The market mechanism leads to a misallocation of resources in the economy, either failing to provide a good or providing the wrong quantity.
What is complete market failure?
A market fails to produce at all, resulting in a ‘missing market.’
What is partial market failure?
A market completes the function, but delivers the wrong amount.
What is a missing market?
There is no market because 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, and market failure is non-existent or trivial.
How does the price mechanism function in the example of pure public goods?
It completely breaks down, leading to complete market failure.
How does an externality such as pollution lead to partial market failure?
Firms and consumers dump their pollution on third parties. There is no market for the unwilling consumers of pollution to charge producers for the discomfort. Without this market, there is no incentive for the polluter to reduce pollution, leading to 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.
