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