Types of market failure

Market failure

Occurs when the free market fails to allocate scarce resources at the socially optimum level of output.

Negative externalities

Caused by self-interest

Won’t be accounted in free market mechanism

Example: C, smoking, P, factory any production

Positive externalities

Caused by self-interest

Won’t be accounted in free market mechanism

Example: C, gym membership, P, education and training

De-merit goods

Information failure, consumers don’t have the right information and make irrational decisions.

EX: Alcohol

Merit goods

Information failure, consumers don’t have the right information and make irrational decisions.

EX: Fruit

Public good

Free rider problem, profit motivated firms

No supply of public goods in the end.

EX: Street lighting

Common access resource

Self interest

Tragedy of the commons, overconsumption and overproduction. (-VE X in P)

EX: Forest

Income inequality

Inequity, unfair, subjective

Factor immobility

Not enough supply,

Geographic immobility

etc

Monopoly power

consumer exploitation, higher than socially optimum price, lower than socially optimum output.