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Economics Unit 5 - 1457145468349
Economics Unit 5 - 1457145468349
Unit - 5
Market Failure
Market Failure
It is an economic term that encompasses a situation where, in any given market, the
quantity of a product demanded by consumers does not equate to the quantity supplied by
suppliers. This is a direct result of a lack of certain economically ideal factors, which
prevents equilibrium. (D≠S; quantitatively and qualitatively)
It is the failure of the market economy to achieve an efficient allocation of resources .
Inefficient allocation of resources is where the unnecessary commodities are produced /
consumed in excess than the essential commodities. (inefficient allocation of
resources; where MSB≠MSC)
Production and consumption may be beneficial / harmful to the society/third party.
The pursuit of self-interest by the individuals leads to increase in social costs.
Types of goods
Excludable Non-Excludable
Private goods
Common goods
Rivalrous A seat in an aircraft, a seat in
Fishing area.
cinema theatre, food, dress etc.
Public enterprise goods Pure Public goods
Non-Rivalrous
Art galleries, museum. Police, defence.
1. Rivalrous goods
A good which can be consumed by only one person at a time (no two people can
consume the same unit).
2. Excludable goods
A good or service is excludable, if people can be prevented from obtaining it, if they
have not paid for it.
3. Non-Rivalrous goods
Non-rivalrous goods may be consumed by many at the same time without preventing
simultaneous consumption by others (benefits are not depleted by an additional user).
4. Non-Excludable goods
A good or service is non-excludable if non-paying consumers cannot be excluded from
consuming it.
In case of non-excludable goods ‘free rider’ problem arises i.e., people benefit from goods
or services even without paying (the question is ‘how to limit free riding and its negative
effects’).
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