Types of Market Failure (1.3.1)

Question 1

What’s Market Failure?

Answer 1

Main role of a free market economy is to allocate scarce resources efficiently. Market Failure is when the free market, left to its own devices, fails to allocate resources efficiently or produce outcomes that are socially optimal. This can result in inefficiencies where certain goods or services are overproduced, underproduced, or misallocated, often leading to negative consequences for society.

Question 2

What is Complete Market Failure?

Answer 2

When a market doesn’t supply products at all. e.g. pure public goods

Question 3

What’s Partial Market Failure?

Answer 3

Happens when a market functions, but doesn’t produce the socially optimal outcome. Overprovides, underprovides, or misprices good/service relative to what would be best for society.

Question 4

What are the three types of Market Failure?

Answer 4

-Externalities
-Public Goods
-Information Gaps

Question 5

What do these 3 types of market failures mean?

Answer 5

1. Externalities- Third Party impacts. Negative and Positive which causes costs and benefits.
2. Public Goods-Non-excludable and Non-Rivalrous (Parks)
3. Information Gaps-The information between buyer and seller is different. One knows more than the other (Assymetric info)

Question 6

How are Externalities a type of Market Failure?

Answer 6

Market equilibrium doesn’t take into account the impact on third parties.
They cause a misallocation of resources — meaning the market price of a good or service doesn’t reflect the full social costs or benefits of producing or consuming it.

Question 7

How are Public Goods a type of Market Failure?

Answer 7

Not provided by free market as they aren’t profitable for firms. Free-rider problem

Question 8

How are Information Gaps a type of Market Failure?

Answer 8

When buyers or sellers lack full or accurate information, they might make poor decisions, causing the market to produce too much, too little, or the wrong type of goods or services.