Market failure

• Market failure


  • allocative inefficiency
  • market failure occurs when the market is unable to efficiently allocate scarce resources to meet the wants and needs of society.
• Government intervention

  Government intervention occurs when the government takes action to remedy allocatively inefficient markets.
• Misallocation of resources


  • a misallocation of resources means that resources are not put to their best, most effective, or efficient use. 
  • either over/under production/consumption if market exists
• Productive and allocative efficiency

  • productive efficiency refers to the (efficient) use of resources to produce given goods and services.
  • the latter refers to which goods and services should be produced, and who should get to consume them.
  • Economics is mostly concerned with is this latter notion of efficiency.​
• Reasons of Market failure

  • Public goods​
  • Externalities​
  • Merit and demerit goods​
  • Monopoly power​
  • Other market imperfections​
  • Inequalities in the distribution of income and wealth
• Complete market failure


  When there is no market whatsoever i.e. a missing market
• Partial market failure


  When a market exists but there is a misallocation of resources
• What is a public good?

  A public good is a good or service that is non-excludable and non-rivalrous, meaning it is available to everyone and one person's use does not diminish its availability to others.
• Non-rivalrous


  Means that the usage of the good by one person doesn't reduce the amount available for another person
• Non-excludable


  Where once the good is provided, it is impossible to stop other individuals from using them
• Examples of public goods

  • the army
  • street lights
  • lighthouse
• Pure public good

  A good where it is impossible to exclude someone from consuming it if they are unwilling to pay for its use
• Valuation

  A method used to try and estimate the worth of public goods
• Free rider problem


  > the free rider problem refers to the difficulty of providing a public good or service when some individuals can consume it without contributing to its production or financing. 

  > firms have little incentive to provide public goods as they wont receive profit. This is why the government is likely to intetvene
• Free-rider

  Someone who benefits from a good or service without paying for it
• Private goods

  A private good is one where its use by an individual stops others from using it whilst its consumption reduces the amount available for consumption by others.

  • rival and excludable goods
• Quasi-public goods

  A quasi-public good is a private good that is similar to a pure public good but there is an ability to stop non-paying consumers from using it.
• Examples of quasi-public goods

  • tunnels
  • restricted-access beach
• Common pool resources


  Resources that are non-excludable but rivalrous
• Tragedy of Commons


  The tragedy of the commons occurs when individual firms acting in their own self-interest deplete or spoil common pool (shared) resources, leading to a loss of social surplus.
• Market failure solutions

  1. direct provision
  2. kvn dflkjv nsklbfd
• Externalities


  Externalities are the costs and benefits to a third party created by economic agents when undertaking their activities.
• Negative externalities


  Negative externalities are those costs to a third party that are not included in the price of the economic activity
• Positive externalities


  Positive externalities are those benefits to a third party that are not included in the price of the economic activity
• Private costs


  Costs of consuming or producing goods or services that have to be paid for by third parties e.g. the individual or a firm
• Social costs

  Costs of consuming or producing goods or services that are paid for by society, including all private costs
• Private costs are the cost of an activity to an individual economic unit
• If social cost is greater than private cost, then a negative externality or external cost is said to exist.  
• Welfare loss


  A situation where marginal social benefit lower than marginal social cost and society does not achieve maximum utility
• Merit goods


  a good that is deemed to be beneficial for society but is underprovided by the market e.g health and education (due to imperfect information)
• the underconsumption of merit goods leads to market failure
• How does the government intervene to increase the supply and consumption of merit goods?

  • subsidy
  • providing more information
  • advertising
  • legislation
• • A merit good will operate where social benefit is greater than private benefit.​

  ​

  • There is a positive externality from providing the good so the government is likely to intervene for the good of society.​
• Demerit goods


  a good that produces negative externalities which are deemed to be bad for society and is overprovided by the market e.g cigarettes, drugs etc
• • A demerit good will operate where social benefit is less than private benefit.​

  ​

  • There is a negative externality from consuming the good so the government is likely to intervene to reduce consumption for the good of society.
• Information failure


  A type of market failure where consumers or producers lack information
• Imperfect Information


  • A buyer or seller lacks the information needed to make the best choice in a transaction
• Symmetric Information


  • Both the seller and the buyer are well informed about the goods and services and prices in the market
• Asymmetric Information


  • Either the seller or the buyer has more information than the other party in a transaction
• Examples of information failure

  • risks from tanning salons
  • nutritional content in food
  • car insurance