Market failure happens when the free market fails to allocate resources to the best interests of society, so an inefficient allocation of scarce resources occurs. This leads to economic and social welfare not being maximised.
Merit goods – goods that are generally good for society, which when consumed give external benefits.
This is associated with information failure as people are unaware of the long-term benefits of consuming the good. They are underprovided in a free market. An example would be education, the positive externality of which is a more skilled workforce. They area product/service that should be available to everyone regardless of ability to pay.
Demerit goods – goods that are socially harmful and cause external costs.
This also associated with information failure as people are unaware of the long-term consequences of such goods, which are often overprovided. An example is smoking, the negative externality of which would be passive smoking.
In the free market, merit goods are part of an incomplete market. Goods such as education would only be provided by the private sector meaning that only those able to afford it would receive merit goods. The opposite is true for demerit goods as they are overprovided due to their profitability which firms exploit.
Excludable – Goods from which you can prevent access for those who have not paid for it.
Rivalrous – Consumption by one person reduces the amount for others to consume.
Public goods are both non-excludable and non-rivalrous and they can be consumed by many at the same time with no additional cost. They are goods which would not be provided – missing market – in the free market as there in no (profit) incentive for such goods e.g. street lighting. The free rider problem is created with non-excludable goods, as it is impossible to prevent people who have not paid for a good from consuming it.
Merit goods are provided by both public and private sector, and is excludable in contrast to public goods which are only provided by the public sector, and cannot reject people who do not pay for them.
Factor immobility is when the factors of production are difficult to move between different areas of the economy. The two main types are geographical and occupational.
An example of geographical immobility would be if there are not many jobs available in Somerset but there are in London, the immobility comes in the difficulty of moving between the two. Some reasons are shown below:
- Cost of buying/renting accommodation.
- Lack of information, as it may be hard for the unemployed to find available jobs and accommodation.
- Personal ties to their place of residence i.e. if they have social or family ties in the area.
- If moving between countries, then the language barrier may also be a factor.
An example of occupational immobility may be the fall of the mining industry which left many workers jobless and without the skills necessary to work in other industries. Some reasons are shown below:
- May be difficult to get training in areas which have jobs.
- They may lack relevant skills/confidence or motivation to work in completely new industries.
- People of a certain age may be unwilling/pessimistic of their ability to learn new skills in high-tech industries.
Imperfect and Asymmetric Information
It is assumed that consumers and suppliers have perfect information when undertaking economic decisions which is rarely the case. This then leads to a misallocation of resources. This will also lead to unexpected consequences of decisions made as buyers and sellers have different levels of information which is known as asymmetric information.
Consequences of environmental change
- High levels of economic growth can lead to increasing production levels which causes more coal and gas resources are used up.
- Deforestation and pollution are also increased (external cost).
- Unpredictable weather/climate changes means uncertainty for farmers and changes the allocation of resources (shortages may occur).