What is Market Failure?

• Market failure happens when the free market does NOT use resources efficiently.

• This means demand and supply alone cannot give the best outcome for society.

⚠️ Examples of Market Failure

• Under-provision (too little produced):

  • Education

  • Healthcare

    
    

    (Only those who can pay get it)

• Public goods problem:

  • Street lights

  • Roads

    
    

    (People can use them without paying → firms won’t supply enough)

• Over-provision (too much produced):

  • Tobacco

  • Alcohol

  • Gambling

• Environmental damage:

  • Pollution from factories

  • Oil extraction

• Monopoly power:

  • High prices

  • Low output

💸 Costs

🟢 Private Costs

• Costs paid by the individual or firm

• Example:

  • Buying a car

  • Petrol

  • Insurance

🔴 External Costs

• Negative effects on others

• No compensation is paid

Examples:

• Air pollution 🚗

• Noise pollution 🔊

• Cigarette smoke 🚬

• Litter 🗑️