MARKET FAILURE
Market Failure: a situation where a free market does not generate an optimal allocation of resources.
In a free market, economic agents will be concerned with their own actions, and how they can maximise the short term benefits they get from undertaking economic activity. As a result, market failure can occur in several areas:
Monopoly: growth of firms in product markets can lead to a lack of competition resulting in some firms having too much power and becoming monopolies.
Externalities: prices might not reflect the true costs and benefits of economic behaviour, so that whilst private costs and benefits might be maximised, social costs and benefits are not which leads to a loss of economic welfare
Public Goods: some products might not be provided in a free market because producers are unable to sell them at a profit
Merit Goods: some goods might be underprovided in a free market because consumers do not have sufficient income to buy them, or a lack of information about the potential benefits from consuming the good
Demerit Goods: some goods might be overprovided in a free market because of the harmful effects the consumption of these goods might have on wider society
Uneven Distribution of Income: income might be shared out in such a way that some individuals might not have enough income to buy the right quantity of goods need to survive
Factor Immobility: factors of production might be immobile, meaning that producers do not have access to the best resources when producing output
Imperfect Information: Economic agents might not have access to the right information, so they do not make optimal economic decisions