market failure

• Market failure occurs when the free market is unable to allocate resources efficiently.
• Positive externalities are spillover benefits enjoyed by third parties who is not directly involved in the consumption or production of the good/service itself, without payment.
• Government decisions need to consider benefits, costs, constraints, information, perspectives, intended and unintended consequences.
• Market failure occurs when the marginal social benefit of producing or consuming an additional unit of the good is not equal to the marginal social cost.
• Decision making framework can be used to help students better appreciate the complexities of the decisions made by governments.
• Socially efficient/socially optimum output is achieved at a quantity (Qs) where society’s welfare is maximised (i.e., no deadweight loss to society).
• There could also be unintended and undesirable consequences due to government limitations.
• Governments may create inefficiencies in their intervention in markets due to high administrative cost, information gaps, time lags, bureaucratic procedures, red tape, corruption, regulatory capture, and short-termism.
• Some economists believe that even with good intentions, governments seldom get their policy application correct, and may create inefficiencies when they intervene in markets.
• Non-economic considerations, such as public and political acceptability, have to be taken into account when governments make policy decisions.
• Government intervention to correct market failures might introduce further inefficiencies due to high administrative cost, information gaps and time lags resulting from red tape and bureaucracies.
• Economies of scale refer to cost-savings as a result of large-scale production.
• Joint provision can generate positive externalities, as evidenced by the consumption of vaccination.
• Joint provision is typically used when there are already private firms operating in the market.
• When the under-consumption is very large, it might make more sense for the government to take over the entire production of the good in order to reap economies of scale, or for reasons such as to ensure equity in the access to the good for all consumers regardless of income levels.
• In the case of Market Failure, the government can intervene through direct provision, where they produce and distribute the good at zero price, or through joint provision, where the private sector continues to provide the good and the government makes up for the shortfall in the market.
• In the case of joint provision, the government can choose to provide the shortfall directly or pay private firms to do so, and this shortfall can be provided free, or at subsidised rates.
• All individuals, regardless of their socioeconomic background, have equal access to consume these goods.
• Market Failure occurs when the socially optimal level of output is not achieved due to government intervention.
• Market failure arises in the case of education due to imperfect information, leading to under-consumption of education.
• Medical insurance premiums incur additional private cost currently but pay benefits only in the event of any future illness, making it less likely for young, healthy individuals to buy medical insurance.
• When left to the free market, some goods, such as alcohol and cigarettes, will be over-consumed because individuals underestimate the actual private cost as they do not consider the long-term costs due to their myopic decision-making, for example, the medical costs of addressing ill effects on their own health from consuming such goods.
• Individuals who consume alcohol on a regular basis often underestimate the negative effects of alcohol on their own health.
• Under-consumption of health insurance occurs when individuals underestimate the actual private cost of healthcare, leading to financial difficulties when hit by illnesses and large medical bills.
• Under-consumption of education can be due to both positive externalities (i.e. consumers are indifferent towards the external benefits enjoyed by third parties) and imperfect information (i.e. ignorance about private benefits).
• Consumers consume at quantity Qf which is less than quantity Qs, leading to market failure.
• Demerit goods are deemed by the government to be undesirable for consumption and over-consumed when left to the free market.
• Market failure occurs when there is a need for government intervention in the case of goods due to imperfect information, leading to myopic decision-making and over- or under-consumption of the good.
• Consumers under-consume due to misinformation, leading to market failure.
• Consumers consume at quantity Qf which is greater than quantity Qs, leading to market failure.
• Consumers under-consume due to under-estimation of private benefits, leading to market failure.
• Merit goods are under-consumed due to positive externalities and imperfect information, while demerit goods are over-consumed due to negative externalities and imperfect information.
• Merit goods are deemed by the government to be desirable for consumption and under-consumed when left to the free market.
• Consumers over-consume due to the presence of highly persuasive advertisements, leading to market failure.
• Consumers over-consume due to over-estimation of private benefits, leading to market failure.
• Information failure, also known as imperfect information, occurs when consumers and producers lack information, potentially caused by inaccurate, incomplete, uncertain or misunderstood data, leading to under/over consumption of the particular good.
• Common causes of imperfect information include myopic decision-making, product complexity, persuasive advertisements & misinformation, user inexperience, addiction, and asymmetric information.
• The new market equilibrium Qf 2 will increase towards and coincide with Qs, and the deadweight loss to society will be eliminated.
• Examples of imperfect information that exist in the market for education and healthcare insurance include imperfect information about education, where parents who are poorly educated may themselves be unaware of the long-term benefits that their children may derive from a proper education, and imperfect information about healthcare insurance, where a young, healthy man may underestimate the probability of him falling seriously ill, and so fails to consider that as he ages, the chances of him becoming ill increases significantly.
• Public education takes the longest time to work as habits and mindsets are hard to change.