Summary
Summary Microeconomics- 1.3 Market faliure
- Module
- 1.3 Market faliure
- Institution
- AQA
Full exam revision notes on the Edexcel Microeconomics 'Market faliure' section 1.3.1 - 1.3.4
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1.3.1 Types of market faliureMarket faliure: the ine cient distribution of goods and services in the free market. Occurring when
the price mechanism fails to allocate scarce resources e ciently or when competitive outcome of
the market is not satisfactory from the point of view of society
Ways a market can fail:
• Negative externalities: causing the social cost of production to exceed the private cos
• Positive externalities: causing the social bene t of production to exceed the private bene t
• Information faliure: merit goods are under-produced while demerit goods are over-produced/
consumed
• Factor immobility: causes unemployment and loss of productive e ciency
• Market dominance by monopolies: under-production and higher prices that would exist under
conditions of competition, causing consumer welfare to be damaged
• Equity (fairness) issue: Markets can generate an ‘unacceptable’ distribution of income and
consequent social exclusion which the government may choose to change
• Private sector in a free-market: can’t pro tably supply to consumers pure public goods and quasi
public goods are needed to meet peoples needs and wants
Ways to over come market faliure:
• Taxes:
helps reduce negative e ects of certain externalities such as pollution, the government can impose
tax on the goods that causes these externalities.
The Pigonvian Tax, is considered to be equal to the value of the negative externality.
Imposing such tax reduces the market outcome of the externality to an amount considered e cient
• Subsidies:
encourages the consumption of a positive externality E,g planting trees
• Government regulations:
The public turns to the government to pass and enact legislation and regulation to curb the negative
e ects of externalities. E.g environmental regulations
Immobility of factors of production:
Occupational: occurs when there barriers to the mobility between di erent sectors of the economy,
leading to these factors being unemployed or used ine ciently.
Workers can be made redundant in industry and nd it hard to nd another job: skills mismatch.
Leading to structural unemployment increasing waste of scarce resources and creates market
faliure
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