Market Failures

Chapter 7 Section 2

Market Failures

• A condition that causes a competitive market to fail.

• There are five main causes of market failure.

Inadequate Competition

• A decrease in competition tends to result in an inefficient use of resources

• Supply Side: Monopolies and Oligopolies

• Demand Side: What if the government is the only buyer for the product?

Inadequate Information

• If resources are to be allocated efficiently to everyone – consumers, businesspeople and government officials must have adequate information.

• If you want the information and it is difficult to obtain, that is a market failure.

Resource Immobility

• The factors of production do not always move to where they are needed most.

Public Goods

• The market, when left alone, either does not supply these goods or it supplies them inadequately.

Public Goods

Externalities

• An externality is an unintended side effect that either benefits or harms a third party not involved in the activity.

• Negative Externality – harms the third party• Positive Externality – benefits the third party• Examples?