1.4 Market failure - notes
Market failure is a situation in which the free market leads to a misallocation of society's scarce resources in the sense that either overproduction or underproduction of a particular good occurs, leading to a less than optimal outcome.
Reasons for market failure
The reasons for market failure include:
- Positive and negative externalities
- Lack of public goods
- Under-provision of merit goods
- Over-provision of demerit goods
- Abuse of monopoly power
- Inequality
In this section we consider the following topics in detail:
- Positive and negative externalities
- How do externalities affect allocative efficiency?
- Possible government responses
- Public goods
- Merit goods
- Demerit goods
- Abuse of monopoly power
- Inequality