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Market Failure

A market is a venue for the exchange of goods and services, and market failure occurs when resources are not allocated efficiently, leading to a loss in social welfare. Key reasons for market failure include monopolies, underproduction of merit goods, overproduction of demerit goods, and externalities. The consequences of market failure can include unemployment, economic contraction, increased poverty, and crime.

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10 views2 pages

Market Failure

A market is a venue for the exchange of goods and services, and market failure occurs when resources are not allocated efficiently, leading to a loss in social welfare. Key reasons for market failure include monopolies, underproduction of merit goods, overproduction of demerit goods, and externalities. The consequences of market failure can include unemployment, economic contraction, increased poverty, and crime.

Uploaded by

alyshaneils2
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Market Failure

What is a Market?
A market is a place where buyers and sellers can meet to facilitate the exchange or
transaction of goods and services

Welfare refers to the feeling of contentment or well-being from the production and
consumption of goods and services. Social welfare is achieved through production efficiency
and allocative efficiency.

A market failure is a situation where free market economy (private sector) fail to allocate
Scarce resources efficiently.
Four reasons why a Market fail are-

MONOPOLY (Sole provider of a good or service


A private monopoly can be classified as a market failure because the market is meant to be
maximising welfare for society. The monopoly prices higher than a competitive market and
restricts output, which is not maximising welfare for consumers.
LACK OF MERIT GOODS IN THE FREE MARKET
Markets may fail to produce enough merit goods, such as education and healthcare. (Under
provision of public goods e.g. streetlights)

OVER PROVISION OF DE MERIT GOODS

Markets may also fail to control the manufacture and sale of goods like cigarettes and
alcohol, which have less merit than consumers perceive. (Demerit Goods)

EXTERNALITIES

Consumers and producers may fail to take into account the effects of their actions on third
parties, such as car drivers, who may fail to take into account the traffic congestion they
create for others. Third parties are individuals, organisations, or communities indirectly
benefiting or suffering as a result of the actions of consumers and producers attempting to
pursue their own self-interest.
Consequences of Market Failure

When market failure occurs, it implies that the market is not achieving a maximisation of
social welfare (in other words, production inefficiency leads to a welfare loss)

1. Unemployment
2. Economic contraction – little economic activity
3. A rise in the level of poverty
4. Crime

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