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Market Failure
When the price mechanism causes and inefficient allocation of resources; the forces of supply + demand lead to a net welfare loss in society
Situation where the free market fails to allocate resources efficiently, resulting in a net welfare loss
Free market
No government intervention
Misallocation of Resources
Where resources (eg. finance, labour, tech, property) are distributed in a way that creates a mis - match between productivity + share of the economy
Government Intervention
When the government acts to share the market by using one or more of a range of strategies (eg, by legislation, policies, taxes, financial support, advice + business support to expand internationally)
Externalities
A “knock on effect” (cost or benefit) to a 3rd party that arises out of business activities
Positive Externalities
Bees of a honey farm pollinate crops of neighbouring farm
Run down area is redeveloped, benefitting anyone who lives nearby with a more attractive view + better facilities
New software is developed. Business who buys it becomes more efficient + can lower prices to customers
Negative Externalities
A factory creates air pollution, which impacts local residents, especially those with respiratory conditions
New school / office block under construction causes a long time of noise pollution for those living + working nearby
Impact of gambling addiction on family life + social cohesion