Lesson 15 - Market Failure

Question 1

What is market failure?

Answer 1

When the free market price mechanism fails to produce the goods that consumers demand, in the right quantity and at a price that satisfies them

Question 2

What is the difference between complete and partial market failure?

Answer 2

Complete = the market doesn’t exists at all
Partial = the market exists, but not the right quantity or price

Question 3

What are the functions of price?

Answer 3

• signal to suppliers of demand
• incentive for firms to produce more
• lead to allocative efficiency - firms produce where profits are higher, and demand is reflected by high prices

Question 4

Give examples of times when market failure can occur

Answer 4

• firms don’t disclose the cost of their production to the environment in the price
• poor people can’t afford the medicines they need
• free market doesn’t supply the goods and services people want