1.3.1 Types of market failure

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    a) Understanding of market failure
    Market failure – Free Markets lead to an inefficient allocation of resources
    Government intervention – required in order to bring about economic efficiency and improve social welfare
    b) Types of market failure
    Externalities
    An externality exists when the social benefits/costs of an economic action are greater than the private benefits/costs.
    Under-provision of public goods
    Occurs when under free market no one would buy a public good and instead they’d just wait for someone else to do so, because no one is willing to buy the good, no one is willing to supply the good so we have ‘missing markets’
    Information gaps
    Information failure/gap – type of market failure where individuals or firms have a lack of information about economic decisions

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