Market failure
Introduced| English | Meaning |
|---|---|
| market failure/ˈmɑːkɪt ˈfeɪlɪə/ | A situation in which markets alone allocate resources inefficiently or fail to provide a socially desirable outcome. |
| merit goods/ˈmerɪt ɡʊdz/ | Goods whose benefits consumers may underestimate, resulting in consumption below a socially desirable level. |
| demerit goods/ˈdemərɪt ɡʊdz/ | Goods whose harmful effects consumers may underestimate, leading to consumption above the level considered socially desirable. |
| externality/ekˈstɜːnælɪti/ | A cost or benefit of an activity affecting third parties that is not fully reflected in the decision-maker's private costs or benefits. |
| third party/θɜːd ˈpɑːti/ | A person or group affected by a decision or transaction despite not being one of its direct participants. |
| negative externality/ˈneɡətɪv ekˈstɜːnælɪti/ | A cost imposed on others by production or consumption that is not fully reflected in the decision-maker's private costs. |
| positive externality/ˈpɒzɪtɪv ekˈstɜːnælɪti/ | A benefit received by others from production or consumption that is not fully reflected in the decision-maker's private benefits. |
| public goods/ˈpʌblɪk ɡʊdz/ | Goods that are non-rival in consumption and non-excludable under the economic definition. |
| monopoly/məˈnɒpəli/ | A market structure in which a single seller supplies a good or service with no close substitutes. |
When markets get it wrong
- A factory makes cheap goods but pumps smoke over a town. The price tag never mentions the dirty air.
- That gap — costs the market ignores — is market failure 市场失灵.
Market failure occurs when:
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It is an inefficient allocation — too much or too little is produced.
What market failure is
- Market failure = when a free market allocates resources inefficiently — too much or too little is produced.
- The market's prices don't capture the full costs or benefits to society.
Merit goods 有益物品 are under-consumed and demerit goods 有害物品 over-consumed, because of information failure
Demand & supply
Market failure: the free-market crossing isn't always best for society.
Air pollution from a factory is an example of a:
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It imposes a cost on third parties — a negative externality.
Education creates a positive externality, benefiting society beyond the student.
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A more educated workforce benefits everyone — a positive externality.
Externalities
- An externality 外部性 is a cost or benefit that falls on a third party 第三方 not involved in the trade.
- Negative externality 负外部性: pollution, congestion. Positive externality 正外部性: education, vaccination.
With a negative externality, true social cost lies above private cost, so the market over-produces.
A good with a negative externality tends to be:
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The market ignores the external cost, so it makes too much.
Street lighting, which markets under-provide, is an example of a ______ good.
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Public goods are non-excludable, so markets under-provide them.
Other types of market failure
- Public goods 公共物品 (street lighting, defence) — markets under-provide them; no one will pay for what they can get free.
A private good is rival and excludable, so firms supply it; a public good is neither, so the market under-provides it
- Merit / demerit goods, monopoly 垄断 power, and missing information all cause failure too.
Over- and under-production both count. Negative externalities → the market makes too much; positive externalities and public goods → it makes too little. Both are failures.
You've got it
- market failure = inefficient allocation; prices miss true social costs/benefits
- a negative externality (pollution) → over-production; a positive one → under-production
- public goods and monopoly are further sources of failure