5.2 The meaning of market failure

Question 1

When does market failure occur?

Answer 1

Market failure occurs when the allocation of goods and services are inefficient and when the market is unable to efficiently allocate scarce resources to meet the needs of society.

Question 2

When does government government intervention occur?

Answer 2

Government intervention occurs when the government takes action to remedy allocatively inefficient markets. Governments will try to ensure that markets work both efficiently and fair.

Question 3

What are the reasons for market failure? (6)

Answer 3

Public goods
Externalities
Merit and demerit goods
Monopoly power
Other market imperfections
Inequalities in the distribution of income and wealth

Question 4

What are externalities?

Answer 4

A cost or benefit that is occurred by a third party who did not agree to incur that cost or benefit

Question 5

What is complete market failure?

Answer 5

Complete market failure occurs when there is no market whatsoever

Question 6

What is partial market failure?

Answer 6

Partial market failure occurs when a market exists but doesn’t provide resources in the optimal quantities