Market Failure

Market Failure

1. Externalities

   • Merit Goods
     • In a Free market system, they tend to be Underconsumed/underproduced
     • How to encourage the consumption/production of merit goods?
       • Subsidise the merit goods
       • Tax incentive
       • Public Campaign
     • e.g.
       • vaccines
       • medicine
     • External benefits when they are consumed/produced
   • Demerit Goods
     • They tend to be overconsumed/overproduced
     • How to discourage the consumption/production of demerit goods?
       • Impose indirect taxes on those goods
       • Prohibition and laws
     • e.g.
       • alcohol
       • external costs
     • External costs when they are consumed/produced

2. Public Goods

   • No one is willing to provide public goods in a market economy due to its non-rivalry/excludable nature.

3. Failure in the economy in the allocation of resources

4. Information Failures

   • Moral Hazard
     • When a customer is misinformed from a more informed supplier so the consumers can the wrong choices - misallocation of resources
       • Can be helped by placing regulations
   • Adverse selection
     • Suppliers/producers are misinformed and makes the wrong choice - misallocation of resources

5. Imperfect Competition

   • Monopolies might occur and would set the price . Customers would suffer from this high price