Types of Market Failure

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