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  • Market Failure- Introduction
    • Key terms
      • signalling function of prices- prices provide information to buyers and sellers
      • incentive function of prices- prices create incentive for people to alter their economic behaviour e.g a higher price creates an incentive for firms to supply more
      • Rationing function of prices- rising prices ration demand for a product
      • Allocative function of prices- directs resources away from overcrowded markets and forward markets that are underserved
      • Complete market failure occurs when the market simply does not supply products at all - we see "missing markets"
      • Partial market failure occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price
    • effects of shifts in demand
      • An increase in demand - assume birth rates rises
        • consumers demand rises- for baby products e.g cots and push chairs
          • if production doesn't increase shortages of the goods develop
            • rational producers and shop keepers will want to maximise income so will increase prices- rations demand
              • producers will enjoy higher prices- which is an incentive
                • other manufacturers will diversify into the market for child care products and therefore existing producers expand
                  • resources are being allocated in a way the consumer approves of
                    • production increases for child care products
    • Markets can fail for lots of reasons:
      • Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost
      • Positive externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit
      • Imperfect information or information failure means that merit goods are under-produced while demerit goods are over-produced or over-consumed
      • The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people's needs and wants
      • Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition, causing consumer welfare to be damaged
      • Factor immobility causes unemployment and a loss of productive efficiency
      • Equity (fairness) issues. Markets can generate an 'unacceptable' distribution of income and consequent social exclusion which the government may choose to change


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