Market Failures Unit 3- Microeconomics

Market Failures The most common market failures involve cases of: Inadequate Competition Inadequate Information Resource Immobility Externalities Public Goods

Inadequate Competition Consequences of decrease in competition: Inefficient Resource Allocation Higher Prices and Reduced Output Economic and Political Power

Inadequate Information If resources are allocated efficiently, everyone knows market conditions If info is hard for consumers to obtain, it’s an example of market failure

Resource Immobility Factors of production cannot move easily to markets where they’d be the most profitable Can make markets function inefficiently

Externalities Externality: unintended side effect that either benefits or harms a third party not involved in the activity that caused it Costs & benefits aren’t reflected in the market price

Negative Externality Negative Externality: harm, cost, or inconvenience suffered by a third party because of the action of others. Ex) pollution, noise, etc.

Positive Externality Positive Externality: A benefit received from someone that has nothing to do with the activity that generated the benefit Ex) Jobs created at new businesses, etc.

Public Good Public Good: products collectively consumed by everyone Interstates and freeways, national defense, police & fire protection

Public Goods cont. Not supplied by the market Market is successful in satisfying individual needs/wants but fails to satisfy them on a collective basis