Market Failure

Market Failure occurs when the free market is unable to allocate resources efficiently

Complete Market Failure (Public Goods)

Markets fail in the provision of public goods which have the main characteristics of non-excludabiltiy and non-rivalrous in consumption.

Non- Excludability

• Non-excludability means that it is technically impossible to exclude non-payers from consuming the good once it is provided.
• For example, once streetlights are provisioned on the roads, it is difficult to stop a motorists from using the light to drive safely.
• Give rise to the "free-rider" problem where one can enjoy the benefits of the good, light, without paying for it
• Demand is thus concealed as no one wants to pay to use it
• Private firms have no incentive to produce the goods

Study Tip

• Use the example of streetlights to ensure analytical rigour in the explanation
• Quote the "free-rider problem" when explaining non-excludability
• Demand is concealed is not the same as there is no demand

Non-Rivalrous

• Non-Rivalrous means that the consumption of the good by one individual does not diminish another individuals ability to consume the good
• For example, one person using the streetlights would not prevent another person from using the streetlights
• Marginal Cost (MC) of providing an additional user is zero
• Since allocative efficiency is only acheived when Price = Marginal Cost (MC), there should zero cost incurred for providing streetlights to an additional user

Study Tip

• Use the example of streetlights to ensure analytical rigour in the paragraph
• MC of providing the good to an additional user is zero is different from MC = 0