Inefficient Resource Allocation & Market Failure (Edexcel IGCSE Economics)

These are goods which have harmful impacts on consumers or society as a whole

They are often addictive

E.g. Gambling, alcohol, drugs, sugary foods and drinks

They are over-provided in a market and their consumption often creates external costs

Governments often have to regulate these goods in such a way that they raise the prices or limit the quantities consumed

These are goods that are beneficial to society but consumers under-consume them as they do not fully recognise the private or external benefits

E.g. Vaccinations, education, electric cars

They are under-provided in a market, and their consumption generates both private and/or external benefits

Governments often have to subsidise these goods in order to lower the price or increase the quantities consumed

Public goods are beneficial to society but would be under-provided by a free market

There is little opportunity for sellers to make profits from providing them, as they are non-excludable and non-rivalrous in consumption

Good examples include national defence, parks, libraries and lighthouses

Non-excludability refers to the inability of private firms to exclude certain customers from using their products. In effect, the price mechanism cannot be used to exclude customers, e.g. street lighting

Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms

Therefore, governments will often provide these beneficial goods themselves, and so they are called public goods

The development of monopoly markets is a natural outcome of a market system

Firms seek to eliminate competition by buying out competitors and increasing their ownership of factors of production

With less competition, firms can raise prices, reduce the choice available to consumers, or limit the supply

The outcome is that goods and services are purposely under-provided in order to raise prices and profits

Governments often intervene to ensure that there is healthy competition in markets and sufficient provision of goods and services

Factor immobility occurs when it is difficult for factors of production to move or switch between different uses or locations

The two main types of factor immobility are the geographical and occupational immobility of labour

Factor immobility results an inefficient allocation of resources in a market (usually under-provision)

Governments often implement programs to reduce the factor immobility in order to raise production and output

E.g. Support relocation of workers when one industry closes down in a particular area

Externalities occur when there is an external cost or benefit on a third party not involved in the economic transaction

These impacts can be positive or negative

The price mechanism in a free market ignores these externalities

If these external costs/benefits were acknowledged, the price and output in the market would be different

Generally, governments will seek to subsidise products which have positive externalities (or provide the product themselves)

Generally, governments will seek to tax products which have negative externalities (or limit their output through regulation)