Causes of Market failure

Define Market failure

Free market fails to allocate scarce resources inefficiently at the social optimum

What are each of the causes of market failure

Externalities - positive/ negative = Self- interest

De merit and merit goods = Information failure

Public goods = free rider problem

Tragedy of the commons = Self- interest

Income inequality = Inequity

Monopoly power = One dominant seller or high barriers to entry

Factor immobility

Explain positive and negative externalities

A positive externality is a positive effect on a third party when consumed

A negative externality is a negative effect on a third party when consumed

What is a merit good and what is a demerit good

A merit good is a good which society values and believes has a positive effect everywhere. A merit good is likely to generate a positive externality when consumed

A demerit good is a good not valued by society as they think it has negative effects. A demerit good is likely to generate a negative externality

What is a public good

Explain the free rider good

A public good is non rivalrous and non excludable which means consumers do not need to compete for this good as it is aplenty and they cannot be excluded from purchasing the good

No firm will produce a public good without a subsidy as there is no profit in doing so as anyone can access this good for free - providing no revenue

What are Common Access resources

Explain the Tragedy of the commons

Natural resources which have no private ownership due to it being difficult and expensive to exclude other producers (Negative production externality)

Due to every producer being able to access these common access resources they will compete to use as many of these resources as they can (self interest) due to many producers trying to use as much of these resources as they can it leads to resource depletion which is a negative externality for generations to come

What is income inequality

Where one group of people earn significantly more money through incomes

How can monopoly power cause market failure

Monopoly power can create high barriers to entry which reduces competitiveness which will ultimately lead to price increases

What is factor immobility`

Factor immobility means that it is hard for factors to be reassigned to different jobs

For example labour immobility means that labour cannot be redirected to a different job quickly