4.1.8.2 The meaning of market failure

Question 1

what is market failure

Answer 1

Market failure occurs whenever a market leads to a misallocation of resources.

Question 2

what is a misallocation of resources?

Answer 2

it is when resources are not 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.

Question 3

what is complete market failure?

Answer 3

it occurs when there is a missing marker.the market does not supply the products at all

Question 4

what is partial market failure?

Answer 4

it occurs when the market produces a good, but it is the wrong quantity or the wrong price

Question 5

what area the different types of market failure?

Answer 5

externalities
the under provision of public goods
information gaps
monopolies
inequalities in the distribution of income and wealth

Question 6

What are externalities?

Answer 6

These occur when a third party is affected by the decisions and actions of others.

there are 2 different types negative and positive externalities

Question 7

what are positive externalities

Answer 7

This occurs when the consumption or production of a good causes a benefit to a third party

Question 8

how do positive externalities lead to market failure?

Answer 8

they create 3rd party spillover benefits which results in social benefit being greater than private benefit.therefore .If there are external benefits the market delivers an output below the quantity that maximises social welfare.

Question 9

what are negative externalities?

Answer 9

it occurs when the consumption or production of a good causes a harmful effect to a third party.

Question 10

how do negative externalities lead to market failure ?

Answer 10

If goods or services have negative externalities, then we will get market failure. This is because individuals fail to take into account the costs to other people.

Question 11

Consumption refers to what curve ?

Production refers to what curve?

Answer 11

Consumption (over or under) shifts the DEMAND CURVE

Production (over or under) shifts SUPPLY CURVE

Question 12

Inequality - market failure

Answer 12

Market transactions reward consumers and producers with incomes and profits, but these rewards may be concentrated in the hands of a few.

Question 13

Why may a market failure arise in the market for public goods?

Answer 13

In the free market, they are unlikely to be produced at the socially optimal level because the private sector would not be able to supply at the optimal level for sufficient profit.

This is is because the free rider problem makes it hard to charge all users.