Market failure
What Market failure means in Economics B A-Level, as defined for Pearson Edexcel.
Definitions of Market failure
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Reference: Pearson Edexcel
A situation in which imperfect or asymmetric information prevents the price mechanism from allocating resources efficiently, distorting prices and quantities away from the socially optimum equilibrium.
A situation where negative externalities cause a divergence between private costs and social costs, so that the free market overproduces goods generating these third-party costs.
A situation in which the existence of externalities causes a divergence between private and social costs or benefits, leading to a misallocation of resources.
When external costs exist, the free market fails to allocate resources efficiently, leading to overproduction because the producer ignores the external costs.
A situation where private firms underinvest in innovation because they cannot capture all the benefits, so the social benefits exceed the private benefits.
Occurs when the price mechanism only considers private values, ignoring external ones, leading to resource misallocation.
Topics that use Market failure
- Externalities (Pearson Edexcel A-Level)
- Market failure and externalities (Pearson Edexcel A-Level)
- Market failure in society (Pearson Edexcel A-Level)
- Potential policy conflicts and trade-offs (Pearson Edexcel A-Level)
- Research and development (R&D) and innovation (Pearson Edexcel A-Level)
Related terms
- Government intervention
- External benefits
- External costs
- Positive externalities
- Resource allocation
- Resource misallocation
- Social costs
- Aggregate demand
Using Market failure in the exam
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