Types of Market Failure 1.3.1 Types of Market Failure

Stuff you should know: Candidates should be able to: Define market failure Assess different types of market failure - externalities, under-provision of public goods and information gaps

What is market failure? Market failure occurs when the free market (the price mechanism) causes an inefficient allocation of resources. This leads to a loss in economic and social welfare.

Why does a market failing lead to inefficiency? There are two primary reasons for efficiency occurring because of a market failure: Firms not maximising their output: their lost output from inefficient production could’ve been used to satisfy more needs and wants- creating unemployed resources. Resources get misallocated and goods may be produced that aren’t wanted, creating a surplus of goods which floods the market, lowering the prices of the good in question. E.g. Ford Model T in 1929 leading up to the market crash. The triangle representing where underproduction is taking place

Why might markets fail? Daniel J. Harris becoming Prime Minister. Externalities- negative or positive externalities are the costs or benefits that affect third parties. An under provision of public goods Imperfect market information