Types of Market Failure

Question 1

Externalities

Answer 1

Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.

Question 2

Information gap

Answer 2

Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully informed decision. For example, risks from using tanning salons, the complexity of pension schemes, uncertain quality of second-hand products and knowledge of the nutritional content of foods and drinks.

Question 3

Market failure

Answer 3

Market failure exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits to society as a whole.

Question 4

Public goods

Answer 4

Pure public goods are non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person, and nonexcludable – where it is not possible to provide a good or service to one person without it being available for others to enjoy.