Market Economic System/Market Failure

Market Economic System

Market where consumers decide what to be produced, resources are allocated with the price mechanism and land and capital are privately owned

Advantages

• Resources are allocated quickly and efficiently according to consumers demand

• Low prices

• More choices for consumers

• Higher Quality

Disadvantages

• May lead to increase in monoply businesses

• Firms wont produce what they think they cant charge

• May not consider external factors

• Advertising can cause consumers to purchase more than they need

• Higher Differences in income

• Firms may not be able produce even if they want to

Market Failure

When the market fails to allocate resources according to consumers demand and at the right prices and right quantities

Public Goods

Goods consumed by the public and are non excludable

• This can cause market failure as firms will not be willing to produce public goods as they are non excludable and non rivalrous meaning they wont be able to charge for it and so it leads to the underprovision of public goods

Merit Goods

Goods that the goverment consider that consumers underappericiate the benefits of and underconsume therefore leading underproduction

• This can lead to market failure as if consumers underconsume this it can reduce the demand for and lead to the underprovision of merit goods

Demerit Goods

Goods that the goverment consider that consumers underappericiate the harms of and overconsume leading to overconsumption

• This can lead to market failure as if consumers overconsume it it can lead to increased demand and overprovision

External Costs and External Benefits

• External costs are costs incurred by someone not directly related to the consumption and production of a product

- Can lead to overpoduction as external costs are not considered

• External benefits - Benfits enjoyed by someone not directly related to the consumption and production of a product

Monopoly

When a single firm controls the market

• When a single firm dominates a market they are not motivated to produce the highest quality goods and the lowest prices due to lack of competition and will lead to inefficient allocation of resources