The Meaning of Market Failure

The Meaning of Market Failure

1. Occurs when the free market, left alone, fails to deliver an efficient allocation of resources. The result is a loss of economic and social welfare.

   • The 7 reasons for markets to fail
     • 1 Negative externalities
       • 2 Positive externalities
         • 3 Imperfect information (causing underproduction of merit goods and overproduction of demerit goods)
           • 4 The private sector being unable to supply important pure public goods and quasi-public goods profitably to consumers
             • 5 Market dominance by monopolies leading to under-production and higher prices
               • 6 Immobility of factors of production (causes unemployment)
                 • 7 Equity issues ('unacceptable' distribution of income and subsequent social exclusion)
   • Market Failure and Economic Efficiency
     • Market failure results in productive inefficiency
       • Businesses are not maximising output from given factor inputs
         • The lost output from inefficient production could've been used to satisfy more needs and wants
           • Resources are misallocated and producing goods and services not wanted (demanded) by consumers
             • This is a problem as resources could be used to make products that consumers would value more higly