Market failure

when the maket forces do not result in the efficient allocation of resources

externalities, non-provision of public goods, information gaps, monopoly, moral hazard, immobility of labour, speculation and market bubbles

efficient allocation of resources

the additition to total costs of producing an extra unit of output

the addition to total benefits of consuming an extra unit

the costs and benefits to third parties that are not directly involved in the transaction

external costs (negative externalities), external benefits (positive externalities)

costs paid directly by the producer and consumer in a transaction

wages, rent, raw materials, energy

price paid for the good or service

air pollution, noise pollution

passive smoking, overeating by individuals

private costs + external costs

benefits that are received directly by the producer and consumer in a transaction

revenues received from the sale of a good or service

utility gained by the consumer from the consumption of the good or service

vaccinations

firm training workers in computing skills

private benefits + external benefits

goods that are non-rivalrous and non-excludable

consumption by one person does not limit consumption by others

cannot prevent anyone from consumin the good

goods that are rivalrous and excludable

street lamps, nuclear defence systems, national parks

when a public good is provided by someone, other people are able to benefit from it without paying

market failure - insufficient number of people are willing to pay for product and it will not be profitable for a business to provide it

when both parties in a transaction have the same information

when one party has more or superior information to the other party

they restrict the ability of consumers and producers to make rational decisions

housing market, life insurance, second-hand car sales, financial services, high-tech products