- Complete market failure
- Complete market failure is when no market forms for a good at all, so none is supplied even though people would value it above its cost.
- Partial market failure
- Partial market failure is when a market for a good forms and trades, yet supplies the wrong quantity of it, too much or too little.
Causes of market failure, each with the clue that gives it away
Can you name the six causes of market failure you may be asked to spot in a case?
An externality is a market exchange that affects a third party who is outside or external to the exchange.
Can you think of an example?
Clue: someone outside the sale gains or loses. Fertiliser from a farm kills the fish an angling club relies on. Verdict: negative externality, partial, too much fertiliser used.
A public good is a good that is non-excludable and non-rival, and thus is difficult for market producers to sell to individual consumers.
Can you think of an example?
Clue: once it exists, nobody can be kept from using it. Street lighting lights every passer-by, paid for or not. Verdict: public good, complete, none supplied.
Information failure is a situation where either the buyer or the seller, or both, are uncertain about the qualities of what they are buying and selling.
Can you think of an example?
Clue: someone would choose differently with the full facts. Many people underestimate how much sugary drinks harm their teeth. Verdict: information failure, partial, too many bought.
Monopoly power is a firm's ability to restrict output, so it sells a lower quantity at a higher price than would have been the case in a perfectly competitive market.
Can you think of an example?
Clue: one seller, or a few, and no close substitute. The only ferry to an island sets fares far above its costs. Verdict: monopoly power, partial, too few crossings.
Factor immobility is when labour or capital cannot easily move to a different job, use or place, so it stays where it is worth less.
Can you think of an example?
Clue: resources stuck in the wrong job or place. Laid-off shipyard welders lack the skills for software jobs in the next city. Verdict: factor immobility, partial, labour left idle.
Inequality of income and wealth is when one group receives a much larger share of total income or wealth than others.
Can you think of an example?
Clue: the market clears, yet the result is judged unfair. Workers with outdated skills cannot rent a decent home while others own several. Verdict: inequity, about who gets the output.