2.8- Market Failure

• What is market failure?


  Market failure occurs when the free market fails to allocate resources to the bets interests of society, so there is an inefficient allocation of scarce resources
• What are the broad consequences of market failure?

  Economic and social welfare are not maximised
• Externality

  A cost or benefit a third party receives from an economic transaction outside of the market mechanism
• Why is it hard to determine a monetary value on market failure

  -involves a value judgment, as different people will value it differently.
• Why are merit goods associated with information failure?

  -consumers don't realise the long-run benefits of consumption, and they are underprovided in the free market.
• Why are de-merit goods associated with market failure?

  • consumers are unaware of long run implications of consumption and they are usually overprovided in the free makret
• Government policies for negative externalities

  -indirect taxes

  -subsidies

  -regulation

  -provide info

  -provide good directy

  -property rights
• What is deadweight welfare loss

  the output where social costs> private benefits
• deadweight welfare gain

  output which shows excess social benefits of costs