What is Market Failure?
Market failure happens when the free market doesn’t work well and resources are not used efficiently.
Main Causes:
Externalities – Side effects of actions:
Negative (e.g. pollution)
Positive (e.g. education)
Public Goods – Things everyone uses (e.g. street lights) that private firms don’t want to provide.
Lack of Information – Buyers/sellers don’t know enough (e.g. health risks).
Monopoly – One seller controls the market, charges high prices.
Too Few Merit Goods – Good for people but underused (e.g. schools).
Too Many Demerit Goods – Bad for people but overused (e.g. smoking).
How Government Fixes It:
Taxes on bad goods
Subsidies for good goods
Laws and rules
Giving information
Providing public goods
