Chapter 7

• Market failure


  Resources are not allocated to the best interests of society
• Resources not allocated properly

  • Money
  • Time
  • Materials
  • Employees
• Examples of market failure

  • Public goods (e.g. road signs)
  • Merit goods (e.g. education)
  • Demerit goods (e.g. smoking)
  • Information failure (e.g. not fully informing consumers of impacts)
• Costs of market failures


  • Costs to society
  • Impact on quality of life
  • Inequality
• Methods of government intervention to counter market failure

  • Regulation (introduce rules to make markets more competitive)
  • Indirect taxation (goods & services with negative impacts may also receive extra levels of taxation, e.g. cigarettes & alcohol)
  • Subsidies (give funds directly to producers to reduce their prices)
  • Government provision (if a good or service isn't being produced, the government can provide it themselves)
  • Information (government implementing policies to ensure consumers are being well informed)
• Externalities


  The impact of economic activity on a third party
• Externalities


  The spill over effect of economic activity
• Positive and negative externalities


  • Pollution (negative externality)
  • A very good school can increase house prices (positive externality)