Market Failure: Economics Help

Market Failure

This occurs when there is an inefficient allocation of resources in a free market.

Positive externalities - benefit to a third party, e.g. less congestion from cycling
Negative externalities - cost imposed on a third party, e.g. cancer from passive smoking
Merit goods - People underestimate benefit of good, e.g. education
Demerit goods - People underestimate costs of good, e.g. smoking
Public Goods - Goods which are non-rival and non-excludable - e.g. police, national defence
Monopoly Power - when a firm controls market and can set higher prices
Inequality - unfair distribution of resources in free market
Factor Immobility - E.g. geographical / occupational immobility
Agriculture - Agriculture is often subject to market failure

Externalities: These occur when a third party is affected by the decisions and actions of others.
Social benefit: is the total benefit to society =
Private Marginal Benefit (PMB) + External Marginal Benefit (XMB)
Social Cost: is the total cost to society =
Private Marginal Cost (PMC) + External Marginal Cost (XMC
Social Efficiency: This occurs when resources are utilised in the most efficient way. This will occur at an output where social marginal cost (SMC) = Social Marginal Benefit. (SMB)