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When does Market Failure exists?
When the market forces fail to achieve an economically efficient equilibrium
List the 7 types of Market Failure
Imperfect Information/Information Gaps
Missing Markets/Public Good
Externalities
“Irrational Behaviour”
Inequality
Factor Immobility
Market Power(e.g. monopoly)
Define “Irrational Behaviour”
Consumers do not always act in their best interests to maximise utility
Define Missing Markets/Public Goods
This is where the price mechanism fails to provide some goods and services e.g. street lighting
Define externalities
The effect on a third party not involved in the economic decision e.g. pollution
Define Imperfect Information/Information Gaps
There may not be enough information to make a rational decision
Define Inequality in terms of market failure
The unequal distribution of income created by the price mechanism
Define Factor immobility
It may be difficult to move factors of production from one type of product to another
Define how Market Power (e.g. Monopolies) is a type of market failure
If one firm has too much market power it can use this to exploit consumers and raise prices
List 12 ways the government can intervene to deal with market failure
Provision of information
Regulation
State provision (of public goods)
Tradable Permits
Maximum prices
Minimum Prices
Subsidies
Indirect Taxation
Nudge
Extension of Property Rights
Prohibition (e.g. drugs)
Restriction (e.g. alcohol)
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