What is market failure? Flashcards
Why does a market fail?
A market fails when the price mechanism (supply and demand) fails to allocate scarse resources efficiently and society suffers as a result.
Who suffers as a result of market failure?
Everyone in society
When is a market classified as being a failing market?
Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society.
What is complete market failure?
Complete market failure occurs when the market simply does not supply products at all - we see ‘ missing markets’. Eg no markets exist to provide national defence so the government needs to provide it.
What is partial market failure?
Partial market failure occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price. Eg if healthcare was left to the market then some people would not be able to afford the treatment that they require, the government might then step in and provide free healthcare such as the NHS.
