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Summary Market Failure basics
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In this document there is a summary of chapters 20-23 of Economics by Alain Anderton but just text so you know the main points that are required for revision.
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Write out notes taken here, accompany them with graphs from textbook Unit 21 answer question 1 and question 3
Unit 23 answer question 3.
Unit 20
2 ways markets may fail:
Partial market failure – markets may lead to over/underproduction of goods
Complete market failure – markets are absent aka missing markets so no production of a
good/service
Types of market failure:
Externalities of economic activity – market prices & profits can mislead, not reflect true prices &
profits to society of economic activities. Eg brazil cutting down rain forests for grazing land for cattle,
makes commercial sense but economic catastrophe bc global warming
Under-provision of public goods – market may undersupply public goods eg defence, street lighting
& police. Easy access to benefits without paying so underprovided without government intervention
Lack of competition eg Monopoly/Oligopoly/Trade Unions – opolies can lead to allocative
inefficiency, pushing up prices by restricting supply, not as efficient as w more competition. Trade
unions can increase costs to firms if successfully increasing wages higher than market rate ->
productive inefficiency
Merit good under provision, demerit good over provision – info failure; consumers not fully
understand benefit of merit goods. Or priv & social costs of demerit goods.
Factor immobility – difficult to transfer use of FOP from one to another eg trains, cars, ships bc of
difficult disassembly, labour as workers with few skills may struggle to find new employment or
unwilling to move to new area bc unaffordable rent
Inequality – in FM economy, individual consumption ability tied to household income.
Household income sources:
wages based on edu, training, skill & loc.
Interest, rent, dividends – earned from banks, housing society accounts, stocks & shares,
property
Priv pensions – unearned income, income from pension fund can be valued & form of
wealth
State benefits – unemployment benefit, child benefit & state pensions
Gov must intervene to prevent market failure eg under provision of healthcare or Y so low that
healthcare provided in FM economy is unaffordable.
Unit 21
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