Study Notes
Market failure occurs when market forces fail to allocate resources efficiently, leading to outcomes that are not pareto efficient. This can result from various causes such as externalities, public goods, and market dominance by monopolies.
- Public goods — goods that can be used by the general public and cannot be charged for. Example: Street lights and roads.
- Merit goods — goods that have positive effects on society and should be consumed more. Example: Schools and hospitals.
- External costs (negative externalities) — negative impacts on society from production or consumption. Example: Pollution from a factory.
- External benefits (positive externalities) — positive impacts on society from production or consumption. Example: Better roads due to a new business.
- Private costs — costs to the producer and consumer from production and consumption. Example: Cost of production.
- Private benefits — benefits to the producer or consumer from production and consumption. Example: Better immunity from a vaccine.
- Social costs — total costs to society from consumption or production. Example: Social costs = external costs + private costs.
- Social benefits — total benefits to society from an economic activity. Example: Social benefits = external benefits + private benefits.
Exam Tips
Key Definitions to Remember
- Market failure
- Public goods
- Merit goods
- External costs and benefits
- Private costs and benefits
- Social costs and benefits
Common Confusions
- Confusing public goods with private goods
- Misunderstanding external costs as only affecting producers
Typical Exam Questions
- What is market failure? Market failure is when market forces fail to allocate resources efficiently.
- What are external costs? External costs are negative impacts on society from production or consumption.
- How do governments correct market failure? Through legislation, taxation, subsidies, and direct provision of goods.
What Examiners Usually Test
- Understanding of different types of market failures
- Ability to explain causes and consequences of market failure
- Knowledge of government interventions to correct market failures