Market failure
Too much or too little produced/consumed vs socially optimum.
Types of market failure
Key definitions
Socially optimum output
Where social benefit equals social cost.
Allocative efficiency
S = D at equilibrium.
Externalities
Third-party costs/benefits.
Public goods
Non-rival and non-excludable.
Information gaps
Asymmetric or incomplete information.
Excess demand
D > S.
Excess supply
S > D.
Price mechanism
S and D setting market price.
Misallocation
Resources not used to maximise welfare.
Social benefit
Total benefit to society.
Social cost
Total cost to society.
Key concepts
Market failure occurs when free markets diverge from socially optimum output.
Three main types in Theme 1: externalities, public goods, information gaps.
Government may intervene to correct failure.
Relevant tips
- Define market failure precisely before analysing type.