Booklet 4 market failure

• Market failure occurs when these three functions of price mechanism break down:

  1. Signalling function
  2. incentive function
  3. rationing function
• Market failure is where there has been a miss allocation of resources and soviet may suffer
• Complete market failure- no market exists. No one is willing to supply the good or service.
• Partial market failure: the market functions but either the price or quantity supplied is wrong
• Public and quasi public goods- goods provided which could not be provided by the market e.g street lighting
• Negative externality occurs when an individuals consumption of a product causes harm to other people, without them receiving any compensation from those affected
• Positive externalities occur when an individual's consumption of a product leads to benefits being enjoyed by others, without them having to pay extra for it
• Externalities are costs/benefits that affect third parties who do not participate in the transaction
• Merit and demerit goods- misinformation leading to the underconsumption of merit goods and overconsumption of demerit goods
• Monopolies lead to under production and higher prices that would exist under conditions of competition. Leads to unemployment
• Causes of market failure:

  1. positive externalities
  2. inequality(geographical immobility)
  3. Monopolies
  4. public goods
  5. demerit goods
  6. merit goods
  7. negative externalities
• characteristic of public good: non-excludable, non-rival, non-exclusive
• Characteristic of private good: A good that is not a public good, meaning that it is excludable and rival
• Private cost + external cost= social cost
• Consumption (negative externality)

  
• production (negative externality)

  
• Consumption ( positive externality)