📚 Market failure happens when the market on its own does not allocate resources efficiently.
Think of it like a crowded school hallway where everyone wants to use the same shortcut – it gets jammed and no one gets anywhere quickly.
In economics, we look at special kinds of goods and costs that cause this jam.
| Term | Definition |
|---|---|
| Public goods | Non‑excludable and non‑rivalrous. Example: Street lighting – everyone can see the street, and one person’s use doesn’t reduce another’s. |
| Merit goods | Goods that society believes people should consume more of than the market supplies. Example: Vaccinations – the government often subsidises them because they benefit everyone. |
| Demerit goods | Goods that are over‑consumed if left to the market because they have negative side effects. Example: Cigarettes – they can harm health and increase healthcare costs for society. |
| Private benefits | The benefit that the individual consumer receives from a good or service. Example: Buying a new phone gives you personal convenience. |
| External benefits | Benefits enjoyed by others who did not pay for the good. Example: A well‑maintained garden improves neighbourhood aesthetics. |
| Social benefits | Total benefit to society = private benefit + external benefit. Example: The combined benefit of a new park includes personal recreation and community well‑being. |
| Private costs | The cost borne by the producer or consumer. Example: The price of a laptop. |
| External costs | Costs imposed on others who did not pay. Example: Factory pollution that harms nearby residents. |
| Social costs | Total cost to society = private cost + external cost. Example: The combined cost of a factory includes production expenses and environmental damage. |
| Monopoly | A market structure with a single firm that can set prices above competitive levels. Example: A local water company that is the only provider in a town. |