Market failure Flashcards
What is market failure?
Where markets fail to allocate resources efficiently.
What are the 4 causes of market failure?
Public goods
Externalities
Asymmetric information
Monopolies and market power
How can public goods cause market failure?
Goods that are both non excludable and rivalrous aren’t provided by free markets as there is no way to make profit on them. therefore can result in market failure if there isn’t enough suppliers of that product.
How can externalities promote market failure?
Externalities are costs or benefits which affects a third party who had no intention in being involved in that economic transaction originally . Therefore they are unpredictable and difficult to understand which leads to market failure.
How may asymmetric information lead to market failures?
When one of the parties in an economic transaction have more information than the other which can lead to monopolies and an adverse selection in products/services.
How may monopolies and market powers result in market failure?
If a firm controls a market they can distort prices and quantities of goods to their own advantage, leading to inefficiencies.
What can governments to do address externalities?
Government intervention
A Pigouvian tax
Subsidies
Regulation
How can government intervention be used to address market failure?
Can correct the market failure threw tax or direct provisions of goods/services, however they can take time to come into effect.
What is a Pigouvian tax?
A tax that’s imposed on any market and will generate negative externalities. Furtherly the tax is intended to correct that markets outcome.
What can subsidies do to correct market failure?
Subsidies are used to encourage the use of positive externalities as they can help to lower production costs which encourage more goods to be produced.
How may regulations reduce the rates of market failure?
They can help to set the limits on negative externalities and also reduce any non competitive behaviours.
What are some consequences of market failure?
- May lead to resources not being used to the fullest potential which is called economic inefficiency.
- May disproportionately affect the lower income individuals as it can cause barrier to entry which furtherly causes spikes in necessary goods or services which is called inequality.
- If gone unnoticed may lead to a loss of welfare due to costs towards society exceeding the benefits.
What are some examples of market failures in the past?
2008 financial crisis - occurred due to market failure which is thought to have been because untruthful information and risky behaviours became public.
Environmental crisis - as price of goods isn’t always incorporated into fun price of pollution it can be considered market failure.
Healthcare industry - is often prone to market failure as individuals may not always receive the correct treatments/information about their condition. Which can lead to an over consumption of medicines and a further waste of money.
