1.3.1 Types of market failure

• Market failure


  When the free market fails to allocate resources to the best interests of society, so there is an inefficient allocation of scarce resources
• Economic and social welfare is not maximised where there is market failure
• Types of market failure

  • Externalities
  • The under-provision of public goods
  • Information gaps
• Externality


  The cost or benefit a third party receives from an economic transaction outside of the market mechanism. In other words, it is the spillover effect of the production or consumption of a good or service.
• Public goods


  Non-excludable and non-rival, and they are underprovided in a free market because of the free-rider problem
• Information gaps


  Consumers and producers have imperfect information when making economic decisions, leading to a misallocation of resources