Market failure

• what Is market failure?

  When the market is unable to efficiently allocate scarce resources to meet the needs of society

  when the allocation of goods and services are inefficient
• What is a misallocation of resources ?

  resources are not put to their most effective use
• what causes market failure?

  • externalities
  • public goods
  • merit and demerit goods
  • monopoly power
• what is complete market failure ?

  when there is no market whatsoever

  goods and services won’t be supplied

  firms will not receive revenue for supplying the product
• what is partial market failure ?

  occurs when a market exists but there is a misallocation of resources
• What is a public good?

  non rivalrous and non excludable goods

  as the consumption of the good does not limit consumption for the next person

  once the good is provided it is impossible to exclude people from using the good
• What is a private good ?

  a private is good is both rivalrous and excludable
• what is an example of a private good ?

  • clothes
  • car
• What is a quasi-public good?

  a private good which adopts the characteristics of public goods

  non excludable but rivalrous
• what are common pool resources ?

  a resource made available to all by consumption but will deplete overtime

  non excludable but rivalrous
• examples of common pool resources ?

  • open water fish
  • trees in a forest
• what is tradegy of commons ?


  occurs when individual firms act in their own self interest deplete or spoil common pool resources
• what is an externality ?

  a cost or benefit to a third party created by economic agents

  where production or consumption leads to a cost or benefit
• What is a negative externality of production ?

  External costs to a third party that are caused by production
• what is a negative externality of consumption ?

  an external cost to a third party as a result of consumption