Market failure notes PDF

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Complete aqa economics notes on market failure...

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Market Failure  Market failure occurs when the price mechanism fails to allocate resources efficiently  Market failure can be complete or partial: o Complete market failure is when no market for a good exists E.G. National Defence o Partial market failure is when the price or quantity sold of the good is wrong E.G. healthcare in the private sector Externalities  Externalities are the effect that producing or consuming a good has on the third party  Externalities can be positive- benefit the third party, or negative- cost the third party  Market failure occurs when the externalities of the good are not factored into price

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Merit/Demerit goods  Merit goods are goods with positive production or consumption externalities that the government elect as merit goods and therefore provide E.G. healthcare

 Without government intervention merit goods would likely be underproduced and consumed as: o In the free market benefits of the good are often ignored o Consumers may not realise the benefits of the good due to imperfect information  Merit goods can be rejected E.G. vaccinations  Demerit goods are goods with negative production or consumption externalities that the government elect as demerit goods and hence restrict  Without government intervention demerit goods would be overconsumed as: o In the free market negative externalities are often ignored o Consumers may not realise the costs of the good due to imperfect information  Governments can intervene with demerit goods by increasing tax E.g., sugar tax or banning products completely E.G., drugs Public Goods  Public goods are non-excludable- no one can be stopped from benefitting from the good  Public goods are non-rivalrous- one person benefiting from the good doesn't stop others benefiting from the good  Public goods include lighthouses and fireworks  Public goods are often underprovided by the free market because: o They are non-excludable – Free rider problem o It is difficult to price public goods as their value is difficult to assess o Firms are reluctant to supply public goods  Quasi-Public goods have some characteristics of both public and private goods: o Goods can be non-rivalrous but excludable E.G., toll booths and parks o Goods can be non-excludable but rivalrous E.G., fish (tragedy of the commons) Private Goods  Excludable  Rivalrous

 Consumers have a choice to consume the good or not Nationalised Industry  Nationalised industries are fully run by the government  This happens so that: o Governments can provide goods and services the country needs better o Governments can set price and output to the socially optimal level o Governments can regulate easier, acting in the countries best interest o Governments can pay workers a fairer wage (Miners) o The industry can benefit from greater economies of scale o Suppliers are paid farer prices o Governments can protect consumer interest (Banks 2008)  However: o Nationalised industries are often x-inefficient as they have little incentive to reduce costs o Moral hazard occurs as they know the government will bail them out  Nationalised industries often cause natural monopolies- this lowers competition

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Privatised Industries  Industries that are owned privately with no government interference  Governments can privatise whole or partial industries

 Partial industry privatisation is known as contracting out (School dinners)  Similarly, governments may hire private firms to offer a service or build a facility. This is known as Public Private Partnership  An example of PPP is PFI which is where the government hires a firm to build a facility, which the government rents until it has been paid off E.G. South Bromsgrove...