Market Failure

Market Failure

• Market failure is the situation in which the allocation of goods and services is always efficient.
• Market failure occurs when demand exceeds supply in the market.
• It occurs when the forces of supply and demand do not result in the efficient allocation of resources

• Market failure is caused by perfect competition in the market.

Types of Market Failure

• Externalities

• Public Goods

• Information Gaps

• Private Goods

Externalities

• Externalities have no impact on the economy.
• Externalities are the positive or negative spillover effects of economic activities experienced by unrelated third parties.

• Externalities are only experienced by the parties directly involved in economic activities.
• Externalities are always intentional consequences of economic activities.

Social Costs = Private Costs + External Costs

What's Private Costs?

• They are the direct costs to producers and consumers for producing and consuming products

• They are the costs in excess of private costs that affect 3rd parties who are not part of their transactions

Social Costs = Private Costs + External Costs

What's External Costs?

• They are the direct costs to producers and consumers for producing and consuming products

• They are the costs in excess of private costs that affect 3rd parties who are not part of their transactions

Social Benefits = Private Benefits + External Benefits

What's Private Benefits?

• They are direct benefits to producers and consumers for producing and consuming a product

• They are benefits in excess of private benefits that affect 3rd parties who are not part of their transactions

Social Benefits = Private Benefits + External Benefits

What's External Benefits?

• They are direct benefits to producers and consumers for producing and consuming a product

• They are benefits in excess of private benefits that affect 3rd parties who are not part of their transactions

Public Goods

• Public goods are goods that are excludable and rivalrous in consumption.
• Public goods are goods that are non-excludable and non-rivalrous in consumption.
• Public goods are goods that are excludable but non-rivalrous in consumption.
• Public goods are goods that are non-excludable but rivalrous in consumption.

Non-rivalrous

• This means that consumption by one person does not limit consumption by others

• This means that if a good is available for one person, it's available for everyone

Non-excludable

• This means that consumption by one person does not limit consumption by others

• This means that if a good is available for one person, it's available for everyone