TYPES OF MKT FAILURE

Question 1

What is market faiure

Answer 1

where free marekt fails to allocate scarce resources at the socially optimum level of output

Question 2

state the 9 market failure causes

Answer 2

negative + positive externalities

demerit + merit goods

public goods

income inequality

monopoly power

common access resources

factor immobility

Question 3

why are externalities a casue of mkt failure

6 parts

Answer 3

not accounted for in the free market mechanism

consumers ignore any impacts on 3rd parties when they consume

producers ignore impacts on 3rd parties when they produce

this is becasue firms are profit maximisers so only consider their private costs

and consumers are utility maximisers so they only consider private benefits

so at the heart of the problem is self interest whihc is an issue if there are external costs or external benefits

Question 4

explain why merit and demerit goods are casues kf mkt failure

4 parts

Answer 4

we don’t know how good or bad these goods are for us so theres informaiton failure in this case which

may casue consumers to make irrational descisiions when they consume

which can lead to the allocation of scarce resources being too high or low

therfore we create an output that isn’t eqal to the socially optimum level of output

Question 5

explain why public good are a casue of mkt fialure

Answer 5

we have the free rider problem and the notion that firms are profit motivated therfore there wont be a supply of public goods

*? -creating a missing mkt which results in mkt failure as there is no ouput of the good so we dont get a socially optimum level of output

Question 6

explain how common acess resources (tragedy of the commons) is a cause of mkt failrue

Answer 6

these goods often overconsumed and over produced becasue there are -ve externalities in production

self interest is at the heart becuase private producers ignore external costs when it comes to producing

Question 7

explain how income inequality is a source f mkt failure

Answer 7

can be argued to be a source of mkt failure on teh grounds of inequity

in a free market if inequality becomes so high its deemed to be ujnfair it can be agued to be a source of mkt failure

Question 8

whats the problem of the idea of inequality as a source of mkt failure

Answer 8

its someone opinion (normative consideration ) of when its too high

Question 9

explain why monopoly power is a source of mkt failure

hint: think of assumptions

5 point

Answer 9

in a free amrket we assume there are many buyers and sellers, perfect information and no barriers to entry and exit

but a monopoly has one dominant seller and high barriers to entry

this gives rise to monopoly power

therfore consumers are exploited withb hgiher than SO prices and lower than SO quantities

casuing mkt failure as we dont have output at eh socially optimum level of outpu

Question 10

explain why factor immobility si a cause of mkt failure

Answer 10

when d shifts right in free markret suppliers can respond and produce extra output, responding to the incentive to icnrease £ and make more profit

however they may be unable to as their FOP may be immobile so they cant increase output meaning we’re left with a misallcoation of scarce reosurces

e.g in labour mkt workers may not be perfectly mobile because they may be ocupational imobile
this therfore stops the PAOSR leading to market failure