What does the point on each

graph below represent?

Productive Allocative Minimum Efficient

Efficiency Efficiency Scale (MES)
Market Failure
 Allocative Efficiency = where society
produces goods and services at minimum
cost that are wanted by consumers

 Productive Efficiency = production of

goods and services at lowest factor cost

 Minimum Efficient Scale = the lowest

point on a cost curve at which a
company can produce its product at a
competitive price.
Market Failure
 Listen to the video clip below on what
to expect from this topic:
 https://www.youtube.com/watch?v=8Du
WQVDi9bQ
Objectives
 Define the term “Market Failure”;
 Outline the main causes of market
failure;
 Discuss the main consequences of
market failure and;
 Identify the solutions to market
failure.
Market Failure
Definition:
Where the market mechanism fails to
allocate resources efficiently to best
satisfy society’s wants leading to
welfare loss.
Market Failure
 Market Failure occurs where:
 Knowledge is not perfect - ignorance
 Goods are differentiated
 Market power (Existence of Monopolies and
Oligopolies)
 Under-provision of Merit Goods
 Non-provision of Public Goods
 Over-provision of Demerit Goods
 Existence of externalities
Market Failure
 Imperfect Knowledge:
 Consumers do not have adequate
technical knowledge
 Advertising can mislead or mis-inform
 Producers unaware of all opportunities
Market Failure
 Goods/Services are
differentiated
 Branding
 Designer labels - they
cost three times as
much but are they
three times the
quality?
 Technology – lack of
understanding of the
impact
 Labelling and product
information
Which one is the ‘quality’ item and why?
Market Failure
 Market Power:
 Existence of monopolies and oligopolies
 Collusion
 Price fixing
 Abnormal profits
 Rigging of markets
 Barriers to entry
Market Failure
 Inadequate Provision of:
 Merit Goods and Public Goods
 Merit Goods – Could be provided by the
market but consumers may not be able
to afford or feel the need to purchase –
market would not provide them in the
quantities society needs
 Sports facilities?
Market Failure
 Merit Goods
 Education – nurseries,
schools,
colleges,
universities – could all
be provided by the
market but would
everyone be able to
afford them?
 Health? Let’s not go
there…
Schools: Would you pay if the state
did not provide them?
Market Failure – Public Goods
 Exclusion or Non-
Provision of Public
Goods
 Markets would not provide
such goods and services
at all!
 Non-excludability – A non-excludable good?
Person paying for the benefit
cannot prevent anyone else from
also benefiting - the ‘free rider’
problem
 Non-rivalry –
Large external benefits
relative to cost – socially
desirable but not
profitable to supply!

Would you pay for this?

Market Failure
 Over provision of De-Merit Goods
 Goods which society over-produces
 Goods and services provided by the
market which are not in our best
interests!
 Tobacco and alcohol
 Drugs
 Gambling
Externalities
 Listen to the following video clip and
answer the questions below:
 https://www.youtube.com/watch?v=JXsr
qr6wjsg

Questions:
1. Define the term “externalities”.
2. What are the 2 types of externalities?
3. Define each type.
4. Give an example of each from your own experience.
5. What is the role of the government and how would
they intervene?
Externalities
 Look at the video on the effects of
over consumption of alcohol:
 https://www.youtube.com/watch?v=wO
KWKBItuCg

 What were some of the costs to

individuals, society and economy?
Market Failure - Externalities
 External Costs and Benefits
 External or social costs
 The cost of an economic decision to a
third party
 External benefits
 The benefits to a third party as a result
of a decision by another party
Market Failure
 External Costs
 Decision makers do not
take into account the
cost imposed on society
and others as a result of
their decision
 e.g. pollution, traffic
congestion,
environmental
degradation, depletion
of the ozone layer,
misuse of alcohol,
tobacco, anti-social
behaviour, drug abuse.
Market Failure
 External benefits –
 by products of
production and
decision making that
raise the welfare of a
third party
 e.g. education and
training, public
transport, health
education and
preventative medicine,
refuse collection,
investment in housing
maintenance, law and
order, maintenance of a
public park.
Consequences of Market Failure
 Unemployment
 Retrenchment
 Economic Contraction
 A rise in the level of poverty
 Decline in provisions for societal welfare
 Micro consequences such as:
 over or under pricing, inefficiency in
production in terms of over or
underproduction, and inefficient use of
resources
Market Failure
 Measures to correct market
failure
 State provision of public and merit goods
 Taxation
 Subsidies
 Prohibition and laws
 Nationalisation of industries
 Summary
Table 1: Complete the following summary table on Market Failure in your
Notebooks
Definition Causes Consequences Solutions
Evaluation
 Q1. What is market failure?
a) When supply is greater than demand
b) When demand is greater than supply
c) The inability of the market to allocate resources efficiently
d) The provision of private goods
Q2
 All of the following are causes of market
failure except:
a) The under-provision of merit goods
b) Non-provision of public goods
c) The operation of markets under perfect
competition
d) The spillover effects of negative and positive
externalities
Q3
 Which of the following is not true about
public goods?
a) They are financed out of taxation
b) They are collectively consumed
c) Consumption by one individual does not
diminish the amount available for
consumption by others
d) These goods possess property rights and
consumption by one individual excludes
others from consuming the good
Q4
 Which of the following is a merit good?
a) Cigarettes
b) Streetlights
c) Roads
d) Health care
Q5
 Which of the following is an example of an
externality?
a) A cigarette smoker who gets lung cancer
b) Your neighbour enjoying music from his new
CD player
c) Residents affected by dust from a nearby
factory
d) A consumer having an alcoholic drink
Q6
 All of the following are consequences of
market failure except:
a) Fewer merit goods being supplied in the market
b) retrenchment
c) A fall in societal welfare
d) unemployment
Evaluation
Attempt CSEC Past Paper Questions:
June 2018 Q2d
June 2015 Q5c
June 2016 Q6f
June 2008 Q2c,d
Follow Up Lesson
 Macroeconomics
 The Government Sector