Market Failure Flashcards
1
Q
Definition
A
When the free market fails to allocate scarce resources at the socially optimum level of of output
2
Q
Types of market failure
A
- externalities
- provision of demerit/ merit goods
- provision of public goods
- tragedy of commons
- income inequality
- monopoly market failure
- immobility of factors
3
Q
What causes externalities
A
Acting in self interest = private optimum, not accounting for social impacts = not producing at socially optimum level.
4
Q
What causes the ineffective provision of demerit/merit goods
A
Caused by information failure, too much or too little of each good is provided because the true impact of them is not known
5
Q
What causes market failure in the provision of public goods
A
Free rider problem + profit motivated firms
6
Q
What causes the tragedy of common
A
The rational pursuit of self interest
7
Q
What causes market failure due to income inequality
A
Ineffective redistribution of income by state.
