1. Types of Market Failure
1.3.1
Types of Market Failure

2. 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

3. 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.

4. 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

5. 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