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MARKET FAILURE
occurs when the market fails to allocate scarce resources efficiently, causing a loss in social welfare loss
3 TYPES: externalities, under-provision of public goods and info gaps
EXTERNALITIES
the cost or benefit a third party receives from an economic transaction outside of the market mechanism- spillover effect of the production or consumption of a good or service
This leads to the over or under-production of goods, meaning resources aren't allocated efficiently
difficult to work out size of externality bc usually based on value judgement
E.G. cars and cigarettes have neg externalities whilst education and healthcare have pos externalities
UNDER-PROVISION OF PUBLIC GOODS
Public goods are non-rivalry and non-excludable, meaning they are underprovided by the private sector due to the free-rider problem
The market is unable to ensure enough of these goods are provided
E.G. of a public good is streetlights
INFO GAPS
consumers are assumed to have perfect information, allowing them to make rational decisions
firms are assumed to have perfect information on their cost and revenue curves and governments are assumed to know the full cost and benefits of each decision
not the case- so, economic agents do not always make rational decisions and so resources are not allocated to maximise welfare
E.G. consumers do not know the quality of second hand products, such as cars, and pension schemes are complex so it is difficult to know which one is best.
