Market Failure

When markets do not provide us with the best outcome in terms of efficiency and fairness,
then we say that there exists market failure.

Market failure occurs whenever freely-functioning markets operating without government
intervention, fail to deliver an efficient allocation of resources and the result is a loss of
economic and social welfare.

Market failure exists when the competitive outcome of markets is not satisfactory from the
point of view of society. This is usually because the benefits that the free-market confers on
individuals or businesses carrying out an activity diverge from the benefits to society as a
whole.

One useful distinction is between complete market failure when the private market simply does
not exist to supply products at all (i.e. we see missing markets eg Public Goods), and partial
market failure, when the market does actually function but it produces the wrong quantity of a
good or service at the wrong price (eg cigarettes market).

Markets can fail for lots of reasons and the main causes of market failure are summarized below:
1) Lack of PUBLIC GOODS
2) A problem of over-supply/over consumption of DEMERIT GOODS and under-supply/under
consumption of MERIT GOODS
3) Producing of NEGATIVE EXTERNALITIES OF PRODUCTION and CONSUMPTION
4) Producing of POSITIVE EXTERNALITIES OF PRODUCTION and CONSUMPTION
5) The existence of IMPERFECT (Asymmetric) INFORMATION and IMPERFECT COMPETITIO
6) The problem of COMMON ACCESS resources and SUSTAINABILITY

Market failure and economic efficiency
When markets function well we experience an efficient and fair (equitable) allocation of
resources.

Market failure results in
Productive inefficiency: Businesses are not maximising output from given factors of
production. This is a problem because the lost output from inefficient production could
have been used to satisfy more wants and needs. Costs are higher and productivity is
lower than it might have been.

Allocative inefficiency: Resources are misallocated and the economy is producing goods
and services that are not wanted or not valued by consumers. This is a problem because
resources might be put to a better use making products that we value more highly.
Allocative efficiency is the most relevant concept that you can use to analyse and
evaluate market failure.

One of Governments major roles therefore is to correct these market failures. However this may
not always turn out the way they intend. (Law of unintended consequences)
GROUP ACTIVITY
Keynote/short film presentation (detailed with interactive activities please)
GROUP 1A- Define, explain and give clear examples of 1) PUBLIC GOODS,
GROUP 1B) over-supply/over-consumption of DEMERIT GOODS and under-supply/under-consumption of
MERIT GOODS

GROUP 2- Define, illustrate and give examples of NEGATIVE EXTERNALITIES OF PRODUCTION and
CONSUMPTION

GROUP 3- Define illustrate and give examples of POSITIVE EXTERNALITIES OF PRODUCTION and
CONSUMPTION

GROUP 4A- Define, explain with examples 1) IMPERFECT (Asymmetric) INFORMATION and

GROUP 4B) IMPERFECT COMPETITION

GROUP 5- Define, explain with examples COMMON ACCESS resources and SUSTAINABILITY

In each case provide

an analysis of the potential solutions (how does Government seek to correct these market
failures and evaluate the effectiveness of these solutions?)
local (UWC), national (Singapore) and International examples where appropriate

You are to present a keynote address (no more than 10 slides) on your topic area

- Research your topic so that you have an brilliant understanding of the concept(s)
- Design and produce a keynote or a short video (max 4 mins) presentation
- While you may use humour to get your ideas across, always remember to be accurate, clear and
Economic in your language/diagrams
- You will have just four periods of class time.
- use visual aids and plenty of good examples (local as well as international) to aid your
Explanations. Please show links to others sources.
- Use diagrams to explain/analyse your concepts and you can add links to a video/podcast. to
enhance your presentation

This activity will be assessed as follows:

Deadline/teamwork 1 2 3 4 5
Knowledge (key Qs) 1 2 3 4 5 6 7 8 9 10
Explanation of topic (KN) 1 2 3 4 5 6 7 8 9 10
Analysis (Diagrams) of topic 1 2 3 4 5 6 7 8 9 10
Use/explan. of examples 1 2 3 4 5 6 7 8 9 10
Creativity 1 2 3 4 5

Total /50





Merit/demerit goods

Deadline/teamwork 1 2 3 4 5
Knowledge 1 2 3 4 5 6 7 8 9 10
Explanation of topic 1 2 3 4 5 6 7 8 9 10
Analysis (Diagrams) of topic 1 2 3 4 5 6 7 8 9 10
Use/explain. of examples 1 2 3 4 5 6 7 8 9 10
Creativity 1 2 3 4 5

Total /50

Public goods/imperfect comp

Deadline/teamwork 1 2 3 4 5
Knowledge 1 2 3 4 5 6 7 8 9 10
Explanation of topic 1 2 3 4 5 6 7 8 9 10
Analysis (Diagrams) of topic 1 2 3 4 5 6 7 8 9 10
Use/explain. of examples 1 2 3 4 5 6 7 8 9 10
Creativity 1 2 3 4 5

Total /50

Externalities of production

Deadline/teamwork 1 2 3 4 5
Knowledge 1 2 3 4 5 6 7 8 9 10
Explanation of topic 1 2 3 4 5 6 7 8 9 10
Analysis (Diagrams) of topic 1 2 3 4 5 6 7 8 9 10
Use/explain.of examples 1 2 3 4 5 6 7 8 9 10
Creativity 1 2 3 4 5

Total /50

Externalties of consumption

Deadline/teamwork 1 2 3 4 5
Knowledge 1 2 3 4 5 6 7 8 9 10
Explanation of topic 1 2 3 4 5 6 7 8 9 10
Analysis (Diagrams) of topic 1 2 3 4 5 6 7 8 9 10
Use/explain of examples 1 2 3 4 5 6 7 8 9 10
Creativity 1 2 3 4 5

Total /50