Economics Notes: Market Failure
1. What is Market Failure?
Occurs when the free market fails to allocate resources efficiently.
2. Types of Market Failure
Externalities: Costs or benefits to third parties not reflected in market
prices.
oNegative externalities (e.g., pollution)
oPositive externalities (e.g., education)
Public Goods:
oNon-excludable and non-rival (e.g., street lighting).
oSuffer from the free-rider problem.
Merit Goods: Under-consumed (e.g., healthcare).
Demerit Goods: Over-consumed (e.g., cigarettes).
Information Failure: Lack of full knowledge (e.g., risks of drugs).
Monopoly Power: Leads to higher prices and reduced output.
3. Solutions to Market Failure
Taxes: On negative externalities (e.g., carbon tax).
Subsidies: For positive externalities (e.g., education).
Regulation: Bans, minimum standards.
Provision: Government provision of public/merit goods.
Information Campaigns: To reduce information failure.
4. Evaluation of Solutions
Government failure possible (e.g., misallocation, administrative costs).
Importance of accurate cost-benefit analysis.
