Types of Market Failure content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Intro to Market Failure Different Types of Market Failure

1. Types of
Market
Failure
Lower 6th Micro
Market Failure

2. Intro to
Market Failure
Types of Market Failure
Mr O’Grady

3. Intro to Market Failure
Market failure: Where the market is unable to efficiently allocate scarce resources
to meet the needs of society
Society can be made better off. Total welfare can be increased
Recap: Classical Economics believes that the markets maximise economic welfare
as the sum of producer and consumer surplus is maximised at equilibrium
However: For a few reasons why this allocation might not be socially optimal:
Price
Quantity
D
S
P
Q
PS
CS
The market only accounts for the producers and direct consumers
of a good.
Third parties can be affected by a good’s consumption and production
Consumers and producers may have incorrect information about
the benefits and costs of a good
They might supply/demand too much or too little to maximise their own
payoff.
A free rider problem may exist
No one provides or pays for the good despite it improving welfare
Merit Good: A good that is under-traded in a free market
Demerit Good: A good that is over-traded in a free market

4. Different
Types of
Market Failure
Types of Market Failure
Mr O’Grady

5. Different Types of Market Failure
Partial market failure: A market exists but there is a misallocation of resources
Externalities: Where the trading of a good generates spill-over costs or benefits
that affect third parties in ways not reflected in the price mechanism
This can result in under or over consumption/production of the good
The spill-over can occur either when the good is made, or when the good is consumed
Imperfect market information: Where consumers and/or producers have
incomplete information about the true benefits and costs of a good
Demand and Supply would be different in a free market compared to if the two parties had
perfect information. Welfare is not maximised
Complete market failure: when there is no market whatsoever, a missing market
Public Goods: Goods which once produced are impossible to prevent people from
consuming, and where the use by one person does not reduce the total amount so
as to leave less available to others
Free-rider problem: In a free market, no one would pay for public goods and so they
wouldn’t be provided despite adding to society’s welfare

6. Where next?
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