Market Failure occurs when free market activity results in a less than optimum allocation of resources from the point of view of society

Lesson - 2.10.2

Market Failure occurs when free market activity results in a less than optimum allocation of resources from the point of view of society

Cause - Demerit Goods

Explanation -

• These are goods which have harmful impacts on consumers/society

  • They are often addictive

  • E.g. Gambling, alcohol, drugs, sugary foods/drinks

    
    

Consequences -

• They are over-provided in a market and their consumption often creates external costs

• Governments often have to regulate these goods in such a way that they raise the prices and/or limit the quantities consumed

  
  

Cause - Merit Goods

Explanation -

• These are goods that are beneficial to society but consumers under-consume them as they do not fully recognize the private or external benefits

• E.g. Vaccinations, education, electric cars

Consequences -

• They are under-provided in a market & their consumption generates both private and/or external benefits

• Governments often have to subsidies these goods in order to lower the price and/or increase the quantities consumed

  
  

 Cause - Public Goods

Explanation -

• Public goods are beneficial to society but would be under-provided by a free market as there is little opportunity for sellers to make profits from providing these goods/services as they are non-excludable and non-rivalrous in consumption

• Good examples include national defense, parks, libraries and lighthouses