3.1.5.2 THE MEANING OF MARKET FAILURE

What is the meaning of market failure?

A situation where the free market (demand and supply) does not allocate resources efficiently leading to a loss of social welfare

Example of market failure

If a farmer pollutes a river, it may produce cheaply, but society pays the cost

What is another word for complete market failure?

Absolute

Define complete market failure

Occurs when the price mechanism fails to supply a good/service where demand exists but no private firm is willing to produce

Examples of compete market failure?

• national defense

• lighthouse services

• public flood defenses

Give an exmaple of complete market failure in Sandbach?

A primark in Sandbach

Define partial market failure?

Occurs when a market for a good/service exists and functions, misallocates resources by producing the wrong quantity or at a wrong price

What does partial market failure result in?

• overproduction and overconsumption of harmful goods

• underproduction and underconsumption of beneficial goods

Define missing market

A type of market failure where a potentially beneficial market for a good/service does mor exist as it is impossible/impratical to charge a price

• demand exists

• no supply provided

What are the 4 functions of price?

• signalling function

• incentive function

• rationing function

• allocative function

Briefly explain each function of prices?

Signaling - prices adjust to demonstrate where resources are required

Incentivizing - prices motivate producers to change their output levels

Rationing - prices act to rationalize scarce resources

Allocating - prices determine how resources are used

Define private goods?

A product or service that is both rivalrous and excludable

What type of markets are private goods sold in?

Markets Shere supply and demand determine prices

Define excludable good?

A producer or service that produces can prevent individuals from consuming if they have not paid for it

Examples of excludable goods?

Only those who pay can access the benefit

• a ticketed movie, a restaurant meal, Netflix subscription, a concert

Define rival goods?

A type of good or service whose consumption by one person limits and prevents its consumption by others

• as the good is depleted or used up

What goods are typically rival goods?

Private goods

• food, clothing, automobiles

When does the best resources allocation occur?

When factors of production are employed in a productively efficient way and in a way that maximizes social welfare

What are 8 causes/things linking to market failure?

1. Negative externalities

2. Positive externalities

3. Public good

4. Merit goods

5. De-merit goods

6. Information failures

7. Monopolies

8. Immobility of factor inputs

Why does market failure happen? Who intervenes?

If it is left to the free market, market failure exists which requires the government to intervene

What are the 2 types of market failure?

• markets function inefficiently

• markets function inequitably

What does markets functioning inefficiency mean? BRIEFLY

The wrong amount

What does markets functioning inequitably mean? BRIEFLY

The wrong distribution

What does markets functioning inefficiently mean?

The market produces too much or too little of something

What is inefficiently functioning markets caused by? And examples

• externalities (such as air pollution)

• monopolies or public goods (streetlights)

  That the probate sector won’t provide

What does markets functioning inequitably lead to?

• leads to wealth gaps, where essential services like healthcare/education only go to those who can afford them