Types of Market Failure

Types of Market Failure content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.

Subtopics
Intro to Market Failure
Different Types of Market Failure

1. Types of Market Failure Lower 6 th Micro Market Failure

2. Intro to Market Failure Types of Market Failure Mr O’Grady

3. Intro to Market Failure Market failure: Where the market is unable to efficiently allocate scarce resources to meet the needs of society Society can be made better off. Total welfare can be increased Recap: Classical Economics believes that the markets maximise economic welfare as the sum of producer and consumer surplus is maximised at equilibrium However: For a few reasons why this allocation might not be socially optimal: Price Quantity D S P Q PS CS The market only accounts for the producers and direct consumers of a good. Third parties can be affected by a good’s consumption and production Consumers and producers may have incorrect information about the benefits and costs of a good They might supply/demand too much or too little to maximise their own payoff. A free rider problem may exist No one provides or pays for the good despite it improving welfare Merit Good: A good that is under-traded in a free market Demerit Good: A good that is over-traded in a free market

4. Different Types of Market Failure Types of Market Failure Mr O’Grady

5. Different Types of Market Failure Partial market failure: A market exists but there is a misallocation of resources Externalities: Where the trading of a good generates spill-over costs or benefits that affect third parties in ways not reflected in the price mechanism This can result in under or over consumption/production of the good The spill-over can occur either when the good is made, or when the good is consumed Imperfect market information: Where consumers and/or producers have incomplete information about the true benefits and costs of a good Demand and Supply would be different in a free market compared to if the two parties had perfect information. Welfare is not maximised Complete market failure: when there is no market whatsoever, a missing market Public Goods: Goods which once produced are impossible to prevent people from consuming, and where the use by one person does not reduce the total amount so as to leave less available to others Free-rider problem: In a free market, no one would pay for public goods and so they wouldn’t be provided despite adding to society’s welfare

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