Market failures Flashcards
What is the price mechanism
The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources.
Define market failure
When the price mechanism leads to the misallocation of resources
List all 7 market failures
Positive and negative externalities
Pubic goods
Information gaps
Monopoly power
Inequitable distribution of income and wealth
Factor immobility
Merit and demerit goods
What are the 3 types of market imperfections
Information gaps
Monopoly power
Factor immobility
What is complete market failure
When the market wouldn’t exist if there wasn’t any government intervention, certain public goods markets
What is partial market failure
When the market exists but doesn’t work perfectly
How do the government intervene to reduce occupational immobility of labour
Investment in Education
Training schemes
Apprenticeship programmes
How do the government intervene to reduce geographical immobility if labour
Investment in transport infrastructure
Relocation subsidies for firms
Why do labour markets fail?
Due to factor immobility
How do factor immobilities lead to labour market failure
Factor immobility leads to unemployment, so skills of potential workers are wasted, considered to be a misallocation of resources, allocative inefficiency, so market failure as a result
Define information gap
This is when consumers lack the information needed to make an informed decision
Name the 2 types of information gaps
Incomplete information
Asymmetric information
Define incomplete information
When someone doesn’t have full information about the benefits or costs of their decisions, this leads to underconsumption or overconsumption
Define asymmetric information
When one party knows more than another party in a transaction
