market failure

• market failure occurs when the market mechanism fails to achieve economic efficiency and the market fails to allocate resources to maximise social welfare
• complete market failure refers to when there is no resources allocated to producing that benefits society meaning that none of this good is made - this is also known as a missing market
• partial market failure refers to when the market provides the goods and allocates resources but in the incorrect quantity. this could be overproduction or underproduction
• normally the free market is good at allocating scarce resources because firms have incentives to produce what people demand in the quality and price that they demand it
• the market may fail because it fails to take into account external costs and benefits. the free market only considers the buyer and the seller so the equilibrium will not include the positive and negative externalities associated with producing or consuming a good
• if the market has a lack of competition then the market may fail - this is because firms will not need to follow the market and can increase price and restrict output
• public goods also cause market failure. this is when a welfare benefit exists to providing a product but there is insufficient private benefit so firms don't provide the good = a missing market
• imperfect information can cause market failure as when buyers and sellers don't have access to all the information supply and demand will not work properly
• factor immobility results in Markey failure as factors of production are not able to move freely to where they must be
• unstable commodity markets such as that for wheat may cause market failure due to the instability of price and output within a market
• inequality of income and wealth is a market failure because it leads to a net welfare loss
• a direct tax is a tax on income, property, or wealth and is solely paid by one entity, it cannot be passed onto other parties
• an indirect tax is a tax on a good or service that can be passed on and is not necessarily paid for by one entity
• when a specific tax is placed on a good the market supply curve will shift left, the market price will incerase, and quantity demanded will decrease
• an ad valorem tax is a tax that is a fixed percentage based on the price of the good or service, this means that the amount paid increases as the price of the good increases - e.g. vat
• a subsidy is a payment made to a producer by a government to help keep prices low and to encourage consumption and production
• a subsidy allows the producer to produce more for the same price because of the financial support from the government
• a subsidy shifts the supply curve right, decreasing price and increasing quantity demanded
• the consumer benefit from a subsidy can be calculated but he distance between the new price and the old price
• a merit good is a good that will be under consumed if left to the free market due to information failure
• a demerit good is a good that will be over consumed if left to the free market due to information failure
• an externality is an external benefit or cost from consuming or producing a good
• consumption externalities will shift the demand curve
• production externalities will shift the supply curve
• a public good Is a good that is non rivalrous and non excludable meaning that they will not be produced by the free market
• a quasi public good is a good that is either non excludable or non rivalrous
• non excludability means that a firm cannot exclude the benefits of the production of a good to the person who pays for it meaning that there will be many people consuming the good for free - this is called the free rider problem
• non rivalry means that the good has an abundance of supply so when one person consumes it, it doesn't restrict the consumption of others (e.g. radio waves)
• public goods result in market failure: Because of non-rivalry and non-excludability, public goods will not be provided by the free market because firms cannot profit from them. This leads to the missing market problem. We call this a total/complete market failure, because the market doesn't supply the good at all.
• a pure monopoly is where there is only one firm in the market for a good or service
• a firm with monopoly power is a firm large enough to act as if they have market power
• a statutory monopoly is any firm with a market share larger than 25%
• a pure monopoly market will have these features: one producer with many consumers, high barriers to entry, no available substitutes, price making behaviour
• a monopoly is a market failure because it does not maximise welfare to society
• a monopoly prices higher than a competitive market and restricts output, which does not maximise welfare for consumers
• a monopoly also doesn't maximise welfare for other poptential suppliers as they are unable to join the market due to barriers to entry being too high
• immobile factors of production are factor inputs that are not easily transferable
• land is immobile as it cannot be moved to other areas int he economy
• capitol land labour can be immobile or moble
• occupational immobility describes a scenario in which a workers skills cannot easily be transferred into the job that is demanded within the economy