Types of Market Failure (1.3.1) Flashcards
What’s Market Failure?
Main role of a free market economy is to allocate scarce resources efficiently. Market Failure is when the free market, left to its own devices, fails to allocate resources efficiently or produce outcomes that are socially optimal. This can result in inefficiencies where certain goods or services are overproduced, underproduced, or misallocated, often leading to negative consequences for society.
What is Complete Market Failure?
When a market doesn’t supply products at all. e.g. pure public goods
What’s Partial Market Failure?
When market functions but supplies either the wrong quantity or at the wrong price
What are the three types of Market Failure?
-Externalities
-Public Goods
-Information Gaps
What do these 3 types of market failures mean?
- Externalities- Third Party impacts. Negative and Positive which causes costs and benefits.
- Public Goods-Non-excludable and Non-Rivalrous (Parks)
- Information Gaps-The information between buyer and seller is different. One knows more than the other (Assymetric info)
How are Externalities a type of Market Failure?
Market equilibrium doesn’t take into account the impact on third parties
How are Public Goods a type of Market Failure?
Not provided by free market as they aren’t profitable for firms. Free-rider problem
How are Information Gaps a type of Market Failure?
Market equilibrium doesn’t take into account the buyer/seller knowledge