Market failure

  • Created by: jamies131
  • Created on: 18-09-18 12:09
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  • Types of market failure
    • Positive externalities
      • Government may place a subsidy on these goods.
    • Negative Externalities
    • Definition: Occurs when there is an inefficient allocation of resources in a free market.
    • Merit goods: People underestimate the benefits of a good E.g. Education
    • Demerit goods: People underestimate the costs of a good E.g. Smoking
      • taxes on these goods might be imposed as a result
      • Laws may be introduced to regulate demerit goods E.g. Ban on cigarette advertisement
    • Public goods: Goods which are non-rival and non-excludable E.g. Police and National defence
    • Monopoly: When a firm dominates the share of a market and therefore set higher prices
    • Inequality: Unfair distribution of resources in a free market
    • Factor immobility: E.g. Occupational or Geographical
    • Agriculture: Often subject to market failure due to volatile prices and externalities
    • Information failure: when there is a lack of information available in order to make an informed choice
    • Principle agent problem: Where there are different individuals working with different objectives and have different knowledge of information about a particular task


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