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Market failure - when the price mechanism fails to allocate scarce resources efficiently leading to a net welfare loss to society. Types of market failure: Externality - A cost or benefit of consumption or production of a good or service to a third party outside of the price mechanism. e Itis the spillover effect of the consumption or production of a good or service. e This leads to the overproduction or underproduction of goods meaning resources aren’t allocated efficiently. e For example, cars and cigarettes have negative externalities whereas healthcare and education have positive externalities. Under-provision of public goods: ¢e Public goods are non-rivalrous and non-excludable, meaning they are underprovided by private firms due to the free-rider problem. e The free rider problem is that firms cannot charge consumers for consuming a public good. e The market is unable to ensure enough of these goods are provided. Information gaps: e Economic agents do not fully understand the costs and benefits associated with a financial decision so they do not always make rational decisions and so resources aren’t allocated to maximise welfare. e For example, consumers do not know the quality of second hand products and pension schemes are complex so it is difficult to know which one is best. 
