market failure

Question 1

Market failure definition

Answer 1

market failure occurs when the market fails to allocate scarce resources efficiently - causing a loss in social welfare

Question 2

what are the 3 main causes of market failures

Answer 2

Externalities

information gaps

under provision of public goods

Question 3

how externalities cause market failure

Answer 3

cost or benefit a third party receives as a spillover effect of the production or consumption of a good or service – leads to the under or over production of G/S – meaning resources are not efficiently allocated

Question 4

how the under provision of public goods causes market failure

Answer 4

Public goods are non rivalry and non excludable – meaning they are underprovided by the private sector due to free rider problem – therefore market is unable to ensure enough of these good such as streetlights are provided

Question 5

how do information gaps cause market failure

Answer 5

Firms and individuals do not always make rational decisions – due to imperfect information – resources therefore not allocated to maximise welfare