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Economics notes part two: Market Failure

Private Goods and Public Goods

Private Goods
Consumers of private goods can be excluded from consuming the
product by the seller if they are not willing or able to pay for it.
Excludability gives the provider the chance to make a profit.…

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Up to a point, extra consumers using a park, beach or road do not reduce the
amount of the same product available to other consumers.
Eventually additional consumers reduce the benefits to other users.
Example: Parks can get overcrowded

Semi non excludable
It is possible but often quite difficult to…

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Merit goods will be UNDERPROVIDED as people will be unaware of the
full benefits and will therefore demand less. This will mean that less is
Demerit goods will be OVERPROVIDED as people will demand more of
a good as they do not understand how bad it is for them.…

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Market Failure

SPEC: Candidates should understand that market failure occurs whenever a
market leads to a misallocation of resources. They should appreciate the
difference between complete market failure (resulting in a missing market), and
partial market failure, where a market exists but contributes to resource
misallocation. Candidates should understand how…

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Missing Markets
o The market can sometimes fail to provide certain goods and
o Merit goods can be under provided such as healthcare and
o This is because the market mechanism can be poor at dealing
with risk and providing information to agents in the market.

Information failure…

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Monopoly and the Allocation of Resources

SPEC: Candidates should understand that monopolies have market power and
that the basic model of monopoly suggests that higher prices and profits and
inefficiency may result in a misallocation of resources compared to the outcome
in a competitive market. Candidates should understand that monopoly…

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4. Natural Cost advantages
Some firms are so big that they can produce on a mass scale and
gain huge economies of scale.
Their average costs fall to a very low level and that means it is
impossible for others to compete.

5. Patents
The exclusive right granted by a…

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Methods of Government Intervention to Correct Distortions in Individual
SPEC: Candidates should be able to use basic economic models to analyse
and evaluate the use of indirect taxation, subsidies, price controls, buffer stocks,
pollution permits, state provision and regulation to correct market failure

The basic economic model:
R Rationing,…

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CONSUMER'S perspective: Originally the consumer was paying price p*
and demanding 0q* however, with the introduction of the Pmax, the
prices have fallen this signals to customers to demand more, the incentive
function suggests the lower prices help to maximise consumer welfare.
This leads to an extension of demand.


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PRODUCER'S perspective: If the NMW rises the cost of production for
firms can also rise. These signals to firms to decrease their demand for
labour. Firms will have less incentive to employ as many workers because
it will reduce their profits. This will lead to a contraction in demand.


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