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    Notes (11/04/2021) Chapter 14 Market Failure

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    Anushka
    Market failure occurs when markets are inefficient and fail to allocate resources optimally. There are several types of market failures: (1) externalities, where costs and benefits from production or consumption are not fully internalized; (2) public goods, which are non-rival and non-excludable; (3) monopoly power and price fixing, which reduce competition; and (4) immobility of resources, which prevents optimal allocation. These market failures can result in underproduction, overproduction, or no production of certain goods and services.

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    Notes (11/04/2021) Chapter 14 Market Failure

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    Anushka
    410 views4 pages
    Market failure occurs when markets are inefficient and fail to allocate resources optimally. There are several types of market failures: (1) externalities, where costs and benefits from production or consumption are not fully internalized; (2) public goods, which are non-rival and non-excludable; (3) monopoly power and price fixing, which reduce competition; and (4) immobility of resources, which prevents optimal allocation. These market failures can result in underproduction, overproduction, or no production of certain goods and services.

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    Market failure occurs when markets are inefficient and fail to allocate resources optimally. There are several types of market failures: (1) externalities, where costs and benefits from production or consumption are not fully internalized; (2) public goods, which are non-rival and non-excludable; (3) monopoly power and price fixing, which reduce competition; and (4) immobility of resources, which prevents optimal allocation. These market failures can result in underproduction, overproduction, or no production of certain goods and services.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    410 views4 pages

    Notes (11/04/2021) Chapter 14 Market Failure

    Uploaded by

    Anushka
    Market failure occurs when markets are inefficient and fail to allocate resources optimally. There are several types of market failures: (1) externalities, where costs and benefits from production or consumption are not fully internalized; (2) public goods, which are non-rival and non-excludable; (3) monopoly power and price fixing, which reduce competition; and (4) immobility of resources, which prevents optimal allocation. These market failures can result in underproduction, overproduction, or no production of certain goods and services.

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    Color Codes: Imp.

    Word, Subtitle, Important, Subtopic, Definitions to remember

    Notes (11/04/2021) Chapter 14 Market Failure


    Economics 14.1 The nature of market failure

    Market failure occurs when market forces fail to produce the product that consumers demand,in
    the right quantities and at the lowest possible cost. Or, market failures arise when markets are
    inefficient.
    - It means that markets are inefficient
    - If left to market forces, some products may be under-produced, some over-produced, and
    some not produced at all
    - Prices may be high due to lack of competition
    - A lack of investment and reduction in expenditure on research and development can also
    slow down the improvement in products

    14.2 Failure to take into account all costs and benefits.


    ❖ The consumption and production of some products may affect people who aren’t
    involved in their consumption or production directly. Also referred to as third-parties.
    - In such cases, the total benefits and the total costs to the society, called social
    benefits and social costs, are greater than the benefits and costs to the consumer
    and producers known as private benefit and private cost.

    Definitions:
    - Third Parties: those not directly involved in producing or consuming a product.
    - Social Benefit: the total benefit to a society of an economic activity.
    - Social Costs: the total costs to a society of an economic activity.
    - Private Benefits: benefits received by those directly consuming or producing a product.
    - Private Costs: costs borne by those directly consuming or producing a product.

    ❖ Costs to the third parties are called external costs.


    - Private cost to the firm will include buying raw-materials, fuel and wages.
    - External Cost if usually imposed on people living nearby, it may include noise
    pollution, air pollution and water pollution

    - External Cost: costs imposed on those who are not involved in the consumption and
    production activities of others directly.
    - External Benefits: benefits enjoyed by those who are not involved in the consumption
    and production activities of others directly.
    - Socially optimum output: the level of output where social cost equals social benefit and
    society’s welfare is maximised
    Color Codes: Imp. Word, Subtitle, Important, Subtopic, Definitions to remember

    14.4 & 14.5 Merit Goods and Demerit Goods


    1. Merit goods: Products which the government considers consumers do not fully
    appreciate how beneficial they are and so which will be under-consumed if left to market
    forces. Such goods generate positive externalities.
    - Eg; Healthcare, education, fire protection etc.

    2. Demerit goods: Products which the government considers consumers do not fully
    appreciate how harmful they are and so which will be over-consumed if left to market
    forces. Such goods generate negative externalities.
    - Eg; Alcohol, drugs, tobacco etc.
    - Demerit goods are over-consumed and hence over-produced. To tackle this
    problem, a government could raise their price by imposing a tax on them.

    14.6 Public and Private Goods


    - A Public Good: is a product which is non-rival and non-excludable and hence needs to
    be financed by taxation
    - They are non-rejectable. It is not possible for people to reject their services of the
    police, for example.
    - The cost of supplying a public good to one more consumer if often zero.
    Defending one more person in the country will be unlikely to cost the army
    anything.

    - A Private Good: is a product which is both rival and excludable (meaning consumers
    don’t need access to it)

    14.7 Abuse of monopoly power


    - Monopoly is when there is a single seller of a product
    - Price Fixing is when two or more firms agree to sell a product at the same price
    ❖ Both of these terms give power to the producer, rather than the consumer
    ❖ This can lead to market failure.

    14.8 Immobility of resources


    - To achieve allocative efficiency, it is necessary for resources to move from producing
    products that are decreasing in demand towards those which are experiencing an increase
    in demand.
    - This requires resources to be both occupationally and geographically mobile. In
    practice, some resources may be immobile.
    - Example: demand for a country’s financial services might be increasing, whilst
    demand for its steel may be decreasing, there may be a shortage of financial
    Color Codes: Imp. Word, Subtitle, Important, Subtopic, Definitions to remember

    services, unemployment of workers and under-utilisation of capital equipment if


    resources cannot easily move between the two.
    - Where there is lack of competition, a firm may not keep its costs down, may charge a
    high price and may produce a poor quality product.
    - The most efficient allocation of resources may not be achieved due to a lack of mobility
    of resources.

    14.9 Short-termism

    ● When firms are looking to make profits quickly


    ● They use all the available resources, which can lead to over consumption
    ● There is no thought to what might happen in the future
    ● This leads to short-term gains for both consumer and producer, but there will be negative
    impacts in the long term
    ● Therefore, private sector firms, keen to earn profits in the short term, may under-invest.

    End of chapter question and answers.

    Multiple Choice Questions (MCQs)


    1. D
    2. B
    3. D
    4. B or A

    Four part question


    a. External Cost: costs imposed on those who are not involved in the consumption and
    production activities of others directly
    b.
    Merit Goods Demerit Goods

    - Products which the government - Products which the government


    considers consumers do not fully considers consumers do not fully
    appreciate how beneficial they are. appreciate how harmful they are.

    - Which will be under-consumed if - Which will be over-consumed if


    left to market forces left to market forces.

    - Also known as positive - Also known as negative


    externalities externalities.
    Color Codes: Imp. Word, Subtitle, Important, Subtopic, Definitions to remember

    - Eg: Healthcare - Alcohol


    c.

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