- Slides: 10
Market Failures Unit 3 - Microeconomics
Market Failures The most common market failures involve cases of: Inadequate Competition Inadequate Information Resource Immobility Externalities Public Goods
Inadequate Competition Consequences of decrease in competition: Inefficient Resource Allocation Higher Prices and Reduced Output Economic and Political Power
Inadequate Information If resources are allocated efficiently, everyone knows market conditions If info is hard for consumers to obtain, it’s an example of market failure
Resource Immobility Factors of production cannot move easily to markets where they’d be the most profitable Can make markets function inefficiently
Externalities Externality: unintended side effect that either benefits or harms a third party not involved in the activity that caused it Costs & benefits aren’t reflected in the market price
Negative Externality: harm, cost, or inconvenience suffered by a third party because of the action of others. Ex) pollution, noise, etc.
Positive Externality: A benefit received from someone that has nothing to do with the activity that generated the benefit Ex) Jobs created at new businesses, etc.
Public Good: products consumed by everyone collectively Interstates and freeways, national defense, police & fire protection
Public Goods cont. Not supplied by the market Market is successful in satisfying individual needs/wants but fails to satisfy them on a collective basis