What is market failure Flashcards
What is market failure?
When the price mechanism causes an inefficient allocation of resources and a dead weight loss of economic welfare. Markets fail when they don’t lead to a socially efficient, equitable outcome
What is market failure most commonly caused by?
- Externalities
- Immobility of the factors of production
- Information failure
- Monopolies causing economic inefficiency
What are markets usually unable to provide?
Public goods
What do markets often lead to the under-production and under-consumption of?
Merit goods; goods with positive externalities
Give some examples of failure in the housing market
- Information gaps between the buyer and seller
- The fact that there are simultaneously homeless people and empty houses makes it seem as though there has been an inefficient allocation of resources
- There are inequalities of wealth within the market, as many people can’t afford to buy or rent
- For many years, there has been a chronic lack of supply in the market; this has led to an excess in demand
State the three main causes of labour market failure
- Labour immobilities
- Disincentives to find work
- Discrimination by employers
- Monopsony of employers
What is occupational immobility?
Barriers to moving between jobs
What is geographical immobility?
Barriers to changing location to find a new job
What is the unemployment trap?
Where the incentives to find work are poor
The poverty trap?
Where there are disincentives to make extra income
