The meaning of market failure

• What is market failure?

  When the market mechanism leads to a misallocation of resources, either completely failing to provide a good or service (missing market) or providing the wrong amount of a good or service in a free market
• What is complete market failure?

  When a market fails to supply the product at all (usually public goods as firms to not profit) creating a missing market
• What is partial market failure?

  When the market fails but is still functioning (producing the wrong amount of goods and services due to a misallocation of resources)
• What is a missing market?

  A situation when there is no market because the functions of prices have broken down.
• How is market failure corrected?

  Through government intervention
• How is reallocation done?

  Producing a better/greater output

  Producing the same output but saving some resources
• What is productive efficiency?

  Where you can't increase the production of one good without decreasing the production of another good
• What is allocative efficiency?

  Where the economy produces a basket of goods that fully supply all consumers wants and needs (ensuring maximum economic welfare)
• What are the different causes of market failure?

  Externalities - an external cost or benefit expressed onto a 3rd party not included in the economic transaction

  The under provision of public goods - public goods are non-rival and non-excludable therefore are underprovided due to the free-rider problem

  Information gaps - imperfect information leads to the misallocation of resources

  Monopolies - consumers are over charged therefore they under consume

  Inequality - causes social unrest which is a negative externality
• what is not maximised in market failure?

  social and economic welfare
• what does a misallocation of resources mean?

  resources are not put to their best , most effective or efficient use