1.3.1 market failure

• market failure occurs when the allocation of resources in a free market result in inefficiency or market has failed to achieve an optimal allocation of goods / services
• market failure leads to underproduction or overproduction or misallocation of resources
• externalities are united side effects of economic activities that affect third parties who are not part of transaction
• positive externalities = benefit
• negative externalities = cost
• an example of negative externalitiy is air pollution and how there is an increase in health costs for nearby resisidentns even if they do not use factory
• a positive externality example Is that vaccinations don't just benefit the vaccinated but also reducing the spread of disease in the community
• public goods are non-excludable and non-rivalrous so no one can be excluded from the benefit and consumption by one does not affect the rest
• public goods is when an individual benefits without paying so there is a tendency for these good to be unprovided by the market
• information gaps arise when one party in a transaction has more / better information than another party leading to adverse selection and moral hazard
• adverse selection is when seller has more information than buyer
• moral hazard is when individuals take riskier actions bc they know their consequences are being paid for