The meaning of market failure

Question 1

define market failure

Answer 1

when the price mechanism leads to a misallocation of resources

Question 2

define complete market failure

Answer 2

when there is a missing market and the market does not supply the G/S at all.

Question 3

define partial market failure

Answer 3

when the good does exist but doesn’t work perfectly e.g. wrong quantity or the wrong price

Question 4

in partial market failure was happens tor resources

Answer 4

resources are misallocated

Question 5

State the 6 main cause if market failure

Answer 5

• Externalities
• Public goods
• Tradegy of the commons
• Merit & demerit goods
• Market imperfections
• Unequal distribution of income and wealth

Question 6

define externalities

Answer 6

the cost or benefit a third party receives from an economic transaction outside of the market mechanism

Question 7

define positive externalities

Answer 7

positive externalities - Benefits which affect third parties outside the price mechanism. they have a positive effect on other people

Question 8

define negative externalities

Answer 8

negative externalities - costs which affect third-partiesoutsidethe price mechanism. they have. negative effect on other people

Question 9

define negative consumption externalities

Answer 9

costs that effect third parties as a result of the consumption of a good

Question 10

define negative production externalities

Answer 10

costs that effect third parties as a result of the production of a good

Question 11

define positive production externalities

Answer 11

benefits which affect third parities as a result of the production of a good - producer created

Question 12

define positive consumption externalities

Answer 12

benefits which affect third parities as a result of the consumption of a good - consumer created

Question 13

why may externalities lead to market failure

Answer 13

there may be an underconsumption or overconsumption of a G/S

Question 14

what are public goods

Answer 14

public goods are non-excludable (t’s very difficult to stop other people from consuming the good) and non-rival (Lots of people can use these goods at the same time)

Question 15

why may public goods lead to market failure

Answer 15

The free rider problem. This describes how consumers wait for other consumer to buy the public good and get a free ride (get to use it for free) and so consumers never actually demands the public good and producers will not want to supply public goods because everyone will just use it for free and they cannot make a profit = market failure = public goods are underproduced/ underporvided

Question 16

what is the tragedy of commons

Answer 16

The tragedy of the commons occurs when common pool resources (natural resources like forests and fish in the sea, clean air, which are not owned privately) are used by either the producer or consumer in a way that is not sustainable

Question 17

why may the tragedy of commons lead to market failure

Answer 17

no private ownership over these resources as it is costly and inefficient to find ways to exclude other producers = may overcomsume above the sustainable threshold

Question 18

define information gaps or imperfect information

Answer 18

when consumers or producers lack the information needed to make an informed decision

Question 19

state the three main types of market imperfections

Answer 19

• imperfect information or information gaps
• monopoly power
• factors mobility

Question 20

how may imperfect information or information gaps lead to market failure

Answer 20

consumer and producers make bad, uninformed decisions.

Question 21

define monopoly power

Answer 21

thepowera firm has to set prices - they are aprice maker.

Question 22

state how monopoly power can lead to market failure

Answer 22

causes market failures when a monopolist charges higher prices, which may lead to under consumption and reduced output, resulting in a partial market failure

Question 23

define factor immobility

Answer 23

when a factor of production is immobile (can’t move)

Question 24

how may factor immobility lead to market failure

Answer 24

If they are immobile and cannot be easily reallocated to match a change in demand, markets will not clear, resulting in the misallocation of resources and partial market failure

Question 25

define wealth

Answer 25

the sum or stock of all your assets added up

Question 26

how may factor an unequal distribution of income and wealth lead to market failure

Answer 26

When wealth or income is not distributed in society, some consumers may not be able to afford to purchase goods and services = may turn to crime, others may fall ill being unable to eat health food, life expectancy and living standards may fall e.t.c
- increased negative externalities such as social unrest

Question 27

define income

Answer 27

• measure the flow of money a person or economy receives each year

Question 28

define merit goods

Answer 28

goods or services that are beneficial to consumer and society but the free market does not provide enough of them

Question 29

define demerit goods

Answer 29

goods which have harmful impacts on consumers or society

Question 30

how may merit or demerit goods lad to market failure

Answer 30

due to information gaps = market failure
- merit goods are under-consumed
- demerit goods are over-consumed