GCSE Economics What is Market Failure?

What is Market Failure? Definition: Where the market mechanism fails to allocate resources efficiently –Prices of good not set to maximise welfare Too high Too low –The quantity produced not set to maximise welfare Too much Too little

Market Failure: When? Market Failure occurs where: –Knowledge is not perfect – ignorance or deception –Goods are differentiated from each other –Resource/Factor immobility e.g. Labour –Lack of competition e.g. Large Firms/Monopolies –Services/goods would or could not be provided in sufficient quantity by the market e.g. street lighting –Existence of external costs and benefits –Inequality exists e.g. wealth, income

Market Failure: Knowledge Imperfect Knowledge: –Consumers do not have adequate technical knowledge –Advertising can mislead or mis-inform –Producers unaware of all opportunities –Producers cannot accurately measure productivity –Decisions often based on past experience rather than future knowledge

How does imperfect knowledge affect the market? Why?

Market Failure Goods/Services are differentiated –Branding –Designer labels - they cost three times as much but are they three times the quality? How do magazines change the way we think?

Market Failure: Immobility Resource Immobility –Factors are not fully mobile –Labour immobility – geographical and occupational –Capital immobility – what else can we use the Channel Tunnel for? –Land – cannot be moved to where it might be needed – e.g. London and South East!

Market Failure: Power of firms Market Power: –Existence of monopolies and oligopolies –Collusion –Price fixing –Abnormal profits –Rigging of markets –Barriers to entry Microsoft has been in and out of court in recent years over claims that it is unfairly controlling the market

Market Failure: Merit and Public goods Merit Goods –Under consumed –People do not see the full benefit of consumption –E.g. Health care and Education Public Goods –Non excludable –Non rivalry –‘Free Rider’ problem –E.g. Street lighting and Police

Under consumption of a Merit Good Why?

Under production of a Public Good Why?

Market Failure: De-Merit Goods & Services De-Merit Goods and Services Consumer do not see the full extent of the harm caused Over consumption Goods and services provided by the market which are not in our best interests! –Tobacco and alcohol –Drugs –Gambling

Over Consumption of a De-Merit Good Why?

Market Failure: Externalities External Costs and Benefits External or social costs –The cost of an economic decision to a third party –Decision makers do not take into account the cost imposed on society and others as a result of their decision –E.g. Pollution External benefits –The benefits to a third party as a result of a decision by another party –E.g. Preventative Health care,

Market Failure Inequality: –Poverty Absolute and Relative –Distribution of factor ownership –Distribution of Income –Wealth Distribution –Discrimination –Housing

World Income Distribution

Market Failure Measures to Correct Market Failure –State Provision –Extension of property rights –Taxation –Subsidies –Regulation –Prohibition –Positive Discrimination –Redistribution of Income –Price Controls –Buffer Stocks

Why? Correcting Market Failure: Taxation

Correcting Market Failure: Subsidy Why?

Correcting Market Failure: Redistribution of Income Why?

Correcting Market Failure: Max/Min Prices Why?