Details on Market Failure

• What is Market Failure?

  When the price mechanism leads to an inefficient allocation of resources and a deadweight loss of economic welfare.
• What is meant by a deadweight loss?

  A cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium.

  Mainly used in economics, deadweight loss can be applied to any deficiency by any inefficient allocation of resources.
• What are some examples/types of market failure?

  • negative externalities
  • positive externalities
  • public goods
  • merit goods
  • de-merit goods
  • information failures
  • monopolies
  • immobility of factor inputs
• How can market failure be fixed?

  Government intervention - intervene in the market

  • subsidies
  • taxes
  • investment
  • price controls
  • market regulation
• What is government failure as a result of?

  Government failure is as a result of government intervention which didn’t work.
• What are externalities?

  How a third party may be affected through consumption or production within a certain market. These can be positive or negative.

  They are spill over effects from production and consumption for which no appropriate compensation is paid/received.
• What are merit goods?

  Goods that have unanticipated benefits to consumers, such that society believes it will be under-consumed in a free market.

  Leads to positive externalities.
• What are de-merit goods?

  Goods that are over-consumed by a market due to some markets having asymmetric information.

  Leads to negative externalities.
• What are the ways we can reduce externalities?

  • impose a tax - known as “making the polluter pay”.
  • pollution tax increases the marginal private costs causing a fall in demand.
  • some economists argue that revenue from pollution tax should be ‘ring-fenced‘ and allocated to projects that protect or enhance the environment.
  • For example, money raised from a conjestion charge might be allocated towards improving mass transport services.
  • Revenue from higher taxes on cigarettes might be used to fund better health programmes.
• What are the two main points to make when evaluating externalities?

  • extent of externality
  • positive & negative externalities
• What are some more details on the extent of the externality when evaluating?

  Some are trivial e.g small noise pollution, some could be related to climate change e.g. masses of pollution due to constant production.
• What are some more details on positive & negative externalities when evaluating?

  If a government encourages consumption of a good with positive externalities, it will also create some negative externalities e.g. COVID vaccines.