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Section 2.4 Market failure - notes

Market failure is a situation in which the free market leads to a misallocation of society's scarce resources in the sense that either overproduction or underproduction of a particular good occurs, leading to a less than optimal outcome.

Reasons for market failure

The reasons for market failure include:

  • Positive and negative externalities
  • Lack of public goods
  • Under-provision of merit goods
  • Over-provision of demerit goods
  • Abuse of monopoly power
  • Inequality

In this section we consider the following topics in detail:

  • Positive and negative externalities
  • How do externalities affect allocative efficiency?
  • Possible government responses
  • Public goods
  • Merit goods
  • Demerit goods
  • Abuse of monopoly power
  • Inequality





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