Market Failure - A-Level Economics

Market failure occurs when the market fails to allocate resources efficiently. In other words, the market fails to achieve Pareto efficiency, where no one can be made better off without making someone else worse off.

There are several causes of market failure, including externalities, public goods, information asymmetry, and market power. Externalities occur when the actions of one party affect the well-being of another party who is not involved in the transaction. Public goods are goods that are non-excludable and non-rivalrous in consumption. Information asymmetry occurs when one party in a transaction has more information than the other party. Market power refers to the ability of a single seller or a group of sellers to influence the market price.

Externalities are the costs or benefits that affect a third party who is not involved in the transaction. For example, pollution from a factory can affect the health of people living nearby, who are not involved in the factory’s production or consumption.

Public goods are goods that are non-excludable and non-rivalrous in consumption. Non-excludable means that it is difficult or impossible to exclude people from using the good. Non-rivalrous means that one person’s consumption of the good does not reduce the amount available for others to consume. Examples of public goods include street lighting and national defense.

Information asymmetry occurs when one party in a transaction has more information than the other party. For example, a seller of a used car may know more about the car’s condition than the buyer, which can lead to the buyer paying more than the car is worth.

Market power refers to the ability of a single seller or a group of sellers to influence the market price. When a firm has market power, it can charge a higher price and produce less output than would occur in a competitive market.

The government can address market failure through various policies, including taxes and subsidies, regulation, and public provision. For example, the government can impose a tax on firms that produce pollution to reduce the negative externality. The government can also provide subsidies for the production of public goods or regulate monopolies to prevent market power.

The consequences of market failure can include inefficiency, inequality, and environmental degradation. Inefficiency occurs when resources are not allocated in the most efficient manner, leading to a loss in total welfare. Inequality occurs when market failure leads to unequal distribution of resources. Environmental degradation occurs when market failure leads to pollution or overuse of natural resources.

To prepare for A-Level Economics exams on the topic of market failure, you should read your textbooks, review class notes, and practice past exam questions. You should also try to apply economic concepts to real-world examples to enhance your understanding. Additionally, you can seek help from your teachers or tutors if you are struggling with any particular concepts.