Market failure

Market failure

1. When there is an inefficient allocation of resources in a free market

2. Types of market failure

   • Positive externalities- benefits to third parties who have nothing to do with the consumption of good/service. E.g. vacines
   • Negative externalities- costs to third parties who have nothing to do with the consumption of goods/services. E.g. smoking
   • Merit goods- underestimated benefits of goods. E.g. education
   • De-merit goods- underestimate costs of good. E.g. Alcohol
   • Public goods- non-rival and non-excludable. E.g. police
   • Monopoly power- firm controls most of the market
   • Unfair distribution of resources
   • Factor immobility
   • Information failure

3. Public good

   • Non-excludable
     • benefits from public goods can't be felt only by the person who paid fro it
   • Non-rival consumption
     • consumption by one consumer doesn't restrict consumption by another consumer
   • Non-rejectable
     • cannot be rejected if you don't want it. E.g. national defence
   • Free-rider problem- difficult to charge people for benefitting from a good or service

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