Market failure

Market Failure

When the market/price mechanism fails to allocate scarce resources efficiently or leads to a net social welfare loss.

Missing Markets

Public goods not provided as they are not profitable.

Factor Immobility

Difficulty in switching jobs or geographical areas.

Asymmetry Information

Information not available to certain groups of people.

Income Inequality

Large gap between the rich and the poor.

Lack of Competition

Gives rise to monopolies, leading to higher prices and lack of motivation to improve.

Externalities

External costs and benefits associated with economic activities.

Demerit Goods

Overproduced and overconsumed goods with negative external costs.

Merit Goods

Underproduced and underconsumed goods with positive external benefits.

Maximum Price

The highest price set by the government to prevent monopolies and protect low-income groups.

Minimum Price

The lowest price set by the government to protect producers and discourage consumption of demerit goods.

Laws and Regulations

Government intervention through price controls.

Taxation

Placing taxes on demerit goods to account for external costs.

Subsidies

Offering subsidies to encourage production of merit goods to account for external benefits.

Nationalisation

Change of ownership from private sector to public sector.

Privatisation

Change of ownership from public sector to private sector.

Advantages of Consuming Resources

Increased employment rates and tax revenue.

Disadvantages of Consuming Resources

Harmful emissions, destruction of habitats, pollution, and depletion of natural resources.