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Market Failures
Chapter 7 Section 2
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Market Failures
• A condition that causes a competitive market to fail.
• There are five main causes of market failure.
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Inadequate Competition
• A decrease in competition tends to result in an inefficient use of resources
• Supply Side: Monopolies and Oligopolies
• Demand Side: What if the government is the only buyer for the product?
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Inadequate Information
• If resources are to be allocated efficiently to everyone – consumers, businesspeople and government officials must have adequate information.
• If you want the information and it is difficult to obtain, that is a market failure.
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Resource Immobility
• The factors of production do not always move to where they are needed most.
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Public Goods
• The market, when left alone, either does not supply these goods or it supplies them inadequately.
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Public Goods
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Externalities
• An externality is an unintended side effect that either benefits or harms a third party not involved in the activity.
• Negative Externality – harms the third party• Positive Externality – benefits the third party• Examples?