1.3 Market failure

A situation where the free market equilibrium doesn’t lead to the socially optimum allocation of resources

Cost/benefit of a good or service that is not included in price and impacts a third party

Goods that are non-excludable and non-rivalrous

Where both parties in a transaction have equal information

Where in a transaction one party has more information than the other

Where insured people are more likely to take risk

Private cost + external cost

Benefits to the individual consuming/producing a good or service

A good that cannot be limited based on payment

Where one person’s consumption does not reduce utility of the good for the next user

Where people benefit from resources, goods or services without paying

Inefficient allocation of resources by the free market

When a market fails to supply any of a good which is demanded, creating a missing market

When the consumption or production of a good or service harms or benefits a third party

a good that is under provided by the market because of the positive externalities that they create

Goods which are over provided by the market because of the negative externalities that they create

- Externalities
- Under provision of public goods
- Information gaps