1.3.1 - Types of market failure

Question 1

What is market failure?

Answer 1

Market failure is when the price mechanism (supply and demand) fail to allocate scarce resource efficiently and society suffers as a result

When competitive outcome of markets is not satisfactory from the point of view of society. What is satisfactory from the point of view of society.

Question 2

What is complete market failure?

Answer 2

Complete market failure occurs when the market simply does not supply the products at all - we see ‘missing markets’ no market exists to provide public goods.

Question 3

What is partial market failure?

Answer 3

Partial market failure occurs when the market does function but it produces either the wrong quantity of a product or at the wrong price. Like negative externalities, production and information gaps. Healthcare wouldn’t be provided by the free market