IGCSE Economics-Review-Market model and Market failure
Market failure occurs when the free market system fails to allocate goods and services efficiently. It can be caused by a variety of factors, such as externalities, imperfect information, and public goods. Understanding market failure is key to understanding economic concepts like supply and demand.
Market Failure: An IGCSE Economics Review
Market failure is a situation where the free market outcome is not efficient, meaning that the total economic welfare is not maximized. It is caused by a variety of factors, such as externalities, public goods, monopoly power, and imperfect information. Externalities refer to a cost or benefit that is not experienced by the parties involved in the transaction, but is experienced by a third party. This can have an effect on the market price and lead to market failure. Public goods are goods that are non-rival and non-excludable, meaning one person’s consumption of the good does not reduce the amount of the good available to others and no one can be excluded from consuming the good. Because of this, private companies cannot make a profit from providing public goods, leading to market failure.
Examples of market failure in Real Life
Market failures can be caused by externalities, which are costs or benefits that are not taken into account by buyers or sellers in a market. The Coase Theorem is an economic principle that states that if transaction costs are low enough, the market will be able to reach an efficient equilibrium without any government intervention. A market failure is not necessarily an indication of a poorly functioning market, but rather a way of measuring the effects of externalities on the market.
Did you know?
What is a Public good-give an example with your answer
What is market failure?
- When the free market fails to allocate resources efficiently
- When the government interferes in markets
- When consumers demand too much of a good or service
Work together in pairs: Q: What are the main causes of market failure in economics?
Work together in pairs: What is an example of a market failure related to an externality, and how is it addressed by government intervention?
Brain break: Draw a tree with big cheesecake as a fruit
What are externalities?
- The costs or benefits of economic activity that are not reflected in prices
- The costs or benefits of economic activity that are reflected in prices
- Government subsidies provided to producers
Which type of externality occurs when an individual’s consumption affects another individual negatively?
- Negative consumption externality
- Positive production externality
- Negative production externality
Which type of goods have characteristics of both private and public goods?
- Quasi-public goods
- Pure public goods
- Private Goods
What is information failure?
- Occurs when people have inaccurate, incomplete, uncertain, or misunderstood data about how markets work
- Occurs when some people don’t have access to certain markets
- Occurs when governments restrict access to certain markets
What is Factor Immobility? Can you give an example