market failure

Question 1

what is market failure?

Answer 1

when there is a fault in the market mechanism, causing the inefficient allocation of resources.

Question 2

what is partial market failure?

Answer 2

when there is still a market for the goods, but there is an overproduction or underproduction of these goods (still inefficient)

Question 3

what is complete market failure?

Answer 3

when there are missing markets for the goods or services, causing them to not be provided.

Question 4

what is the market mechanism?

Answer 4

where demand and supply interact to determine the price equilibrium / market price

Question 5

what are missing markets?

Answer 5

when the market mechanism fails to supply any of a certain good

Question 6

what are the 3 types/causes of market failures?

Answer 6

1. information gaps
2. under-provision of public goods
3. externalities

Question 7

information gaps:

Answer 7

when there is an imbalance in the information consumers and producers know
e.g. when cigarettes first came out, no one but the firms knew that it could cause cancer
e.g. health insurance firms don’t know as much about the risk of a person as the consumer
e.g. second-hand car markets: sellers know more about the state of the car than consumers so can charge higher prices than it deserves

Question 8

under-provision of public goods:

Answer 8

private companies can’t charge people for their use of public goods like street lighting and policing, as it’s unknown how much they use it. Therefore, it is easy to benefit from public goods without having to pay for them, which leads to them being underprovided if left to the free market.

Question 9

externalities:

Answer 9

when markets put out misleading signals on price and profits, so leads to the inefficient allocation of resources.