Types of Market Failure

• 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