Market failure
9 flashcards to master Market failure
Smart Spaced Repetition
Rate each card Hard, Okay, or Easy after flipping. Your progress is saved and cards are scheduled for optimal review intervals.
Define 'market failure' and provide an example.
Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a loss of economic welfare. An example is pollution from a factory, where the cost to society isn't reflected in the factory's production costs.
Explain the difference between an 'external cost' and an 'external benefit'.
An external cost is a negative impact on third parties from production or consumption (
What is a 'public good' and why does the free market often fail to provide it adequately?
A public good is non-excludable (everyone benefits, even if they don't pay) and non-rivalrous (one person's consumption doesn't diminish availability to others). The free market under-provides public goods due to the free-rider problem.
Give two characteristics of a 'merit good'.
Merit goods are goods or services that are considered to be beneficial for individuals and society but are under-consumed due to information failure or individuals undervaluing the benefit. Examples include education and healthcare.
Explain the concept of a 'demerit good' and give an example.
A demerit good is a good or service that is considered to be harmful to individuals and society but is over-consumed due to information failure or individuals undervaluing the harm. An example is cigarettes.
Describe 'information failure' and how it can lead to market failure.
Information failure occurs when consumers or producers lack complete information to make informed decisions. This can lead to over- or under-consumption of goods and services, causing a misallocation of resources.
What is 'monopoly power' and how does it relate to market failure?
Monopoly power is the ability of a firm to control prices and output in a market. It can lead to market failure because monopolies often restrict output and charge higher prices than in a competitive market, reducing consumer surplus and overall welfare.
Explain how a government subsidy can be used to correct market failure related to a merit good.
A subsidy lowers the cost of production, leading to lower prices for consumers. This encourages increased consumption of the merit good, bringing the level of consumption closer to the socially optimal level.
How can the government use indirect taxes to correct market failure associated with demerit goods?
Indirect taxes, such as excise duties, increase the price of demerit goods. This discourages consumption, reducing the negative externalities associated with these goods, and shifting consumption towards the socially optimal level.
Key Questions: Market failure
Define 'market failure' and provide an example.
Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a loss of economic welfare. An example is pollution from a factory, where the cost to society isn't reflected in the factory's production costs.
What is a 'public good' and why does the free market often fail to provide it adequately?
A public good is non-excludable (everyone benefits, even if they don't pay) and non-rivalrous (one person's consumption doesn't diminish availability to others). The free market under-provides public goods due to the free-rider problem.
Give two characteristics of a 'merit good'.
Merit goods are goods or services that are considered to be beneficial for individuals and society but are under-consumed due to information failure or individuals undervaluing the benefit. Examples include education and healthcare.
Explain the concept of a 'demerit good' and give an example.
A demerit good is a good or service that is considered to be harmful to individuals and society but is over-consumed due to information failure or individuals undervaluing the harm. An example is cigarettes.
Describe 'information failure' and how it can lead to market failure.
Information failure occurs when consumers or producers lack complete information to make informed decisions. This can lead to over- or under-consumption of goods and services, causing a misallocation of resources.
About Market failure (2.9)
These 9 flashcards cover everything you need to know about Market failure for your Cambridge IGCSE Economics (0455) exam. Each card is designed based on the official syllabus requirements.
What You'll Learn
- 5 Definitions - Key terms and their precise meanings that examiners expect
- 2 Key Concepts - Core ideas and principles from the 0455 syllabus
How to Study Effectively
Use the Study Mode button above to test yourself one card at a time. Try to answer each question before flipping the card. Review cards you find difficult more frequently.
Continue Learning
After mastering Market failure, explore these related topics:
- 2.8 Market economic system - 9 flashcards
- 2.10 Mixed economic system - 10 flashcards
Study Mode
Space to flip • ←→ to navigate • Esc to close
You're on a roll!
You've viewed 10 topics today
Create a free account to unlock unlimited access to all revision notes, flashcards, and study materials.
You're all set!
Enjoy unlimited access to all study materials.
Something went wrong. Please try again.
What you'll get:
- Unlimited revision notes & flashcards
- Track your study progress
- No spam, just study updates