Learn: Market Failure

Welcome!Today we'll learn about market failure. This is when markets fail to allocate resources efficiently, leading to a loss of economic and social welfare.

What is Market Failure?Market failure occurs when the free market system does not achieve an efficient allocation of resources. This happens when the market produces too much or too little of a good, or fails to produce it at all.

Types of Market FailureMarket failure can arise due to externalities, public goods, merit and demerit goods, and information asymmetry. These factors can distort the efficient functioning of markets.

ExternalitiesExternalities occur when a third party is affected by the production or consumption of goods and services. These can be positive (benefits) or negative (costs).

Public GoodsPublic goods are goods that are non-rivalrous and non-excludable. Examples include street lighting and national defence. Because they are non-excludable, free riders can benefit without paying.

Merit and Demerit GoodsMerit goods are under-consumed in the market despite having positive externalities, like education and healthcare. Demerit goods, like tobacco, are over-consumed and have negative externalities.

Information AsymmetryInformation asymmetry occurs when one party in a transaction has more information than the other. This can lead to suboptimal outcomes, such as buyers overpaying for low-quality goods.

Government InterventionGovernments can address market failure through policies like taxes, subsidies, and regulations. These aim to reduce inefficiencies and improve welfare.

Review Time!Great work! You've learned about market failure, its types, and the role of government intervention. Now let's test your understanding with a few questions.