Market failure Flashcards
Free market
Prices of goods and services determined by supply and demand and not by government intervention.
Assumptions of the free market
-Low/no barriers to entry/exit
-Fair amount of buyers and sellers
-Good information
PartialMarket failure
When the free market fails to allocate scarce resources in the most efficient way
Market failure notes
The price (influenced by demand and supply) doesn’t reflect all benefits or opportunity costs of the good (resulting in less than optimal outcomes)
What causes market failure
Costs/benefits that aren’t accounted for when firms are setting a price and hence results in a market failure of some kind
Complete market failure
No goods supplied to a market at all (missing market). E.G. Consumers want pink bricks but no one sells them
Partial market failure
Goods supplied but at either at a wrong price or output. E.G. if healthcare was left to market forces then some people wouldn’t be able to afford treatment
Market failure types
-Public goods
-Externalities
-Merit and demerit goods
-Monopoly
-Inequalities
-FOP inequality
Public goods market failure
Public goods are non excludable and not usually provided by firms so cant usually charge for use and as a result, it is not efficiently allocated
Externalities market failure
External costs/benefits not accounted for which may result in over/under production
Non excludable
Goods/services that are accessible by everyone
