Market Failure

Question 1

When does a market fail ?

Answer 1

• A market fail when the price mechanism( forces of supply and demand ) fails to allocate scarce resources efficiently and society suffers as a result.

Question 2

Market failure can be complete or partial /NOTES

Answer 2

• When there is a complete market failure , no market exists , this is called a ‘missing market’
• When the market functions , but either the price or quantity supplied of the good/service is wrong , there is partial failure.
• The provision of healthcare , if left completely to market forces , is an example of partial failure. If healthcare was left to market forces , then some people would not afford it. As a result , government might intervene and provide free health care .

Question 3

What are externalities ?

Answer 3

-Externalities are the effects that producing or consuming a good/service has on people who are not involved in the making, buying/selling and consumption of the good/service . These people are often called third parties.