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Economics A Level
Micro - Paper 1
Types of Market Failure
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Created by
Toby Landes (GRK7)
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Cards (11)
Market failure
Occurs where the
free
market
fails
to
allocate scarce resources
at the
socially optimum level
It's crucial to have watched the previous video on
allocative efficiency
in a
free market
before watching this one
Reasons for market failure
Externalities
(negative and positive)
Merit
and
demerit
goods
Public
goods
Common
access resources
Income
inequality
Monopoly
power
Factor
immobility
Externalities
Negative impacts or positive impacts on
third parties
as a result of
production
or consumption
Consumers and firms ignore
externalities
as they only consider their
private
costs and benefits
Merit
and
demerit
goods
Goods or services that are either
worse
for us than we think or better for us than we think, due to
imperfect
information
Public goods
Goods where there is a
free rider
problem, so firms will not supply them
profitably
Common access resources
Resources that are
over-consumed
and over-produced due to
negative
externalities
Income inequality
Can be a source of market failure on grounds of
equity
(fairness)
Monopoly power
Occurs when there is only
one
dominant seller, leading to
higher
prices and lower quantities than socially optimal
Factor immobility
Occurs when factors of production (e.g. labour) cannot respond to changes in
demand
, leading to a
misallocation
of resources