Chapter 10: Market Failure

Explainer

What you'll learn in this chapter

• define market failure as an inefficient/inequitable allocation of resources by the price mechanism
• explain key causes: externalities, public goods, monopoly power and information failure
• evaluate policy responses: regulation/competition policy, taxes/subsidies, public provision and deregulation

Core ideas

Markets work best when prices reflect true costs and benefits and when information is available. When third parties are affected (externalities), goods are under/over-provided (public goods), firms gain excessive market power, or consumers are misled (asymmetric information), outcomes can be socially inefficient.

Exam focus

• identify the failure in a real-world extract (e.g. misleading pricing / “Black Friday” claims)
• use a diagram where relevant (monopoly deadweight loss; externality framework)
• policy evaluation: propose an intervention and discuss at least one drawback

Interactive: Externalities

An externality is a cost or benefit that spills over to a third party not involved in the transaction. Toggle between negative production externality (e.g. pollution) and positive consumption externality (e.g. education) to see how they cause market failure.