2025 H2 Market Failure Notes ACJC

1 ©ACJC Econs Dept/2025/H2 Market Failure ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics 2025 H2 MARKET FAILURE AND GOVERNMENT INTERVENTION Section Content Page 1 Efficiency in Markets 3 2 Market Failure and Government Intervention 5 2.1 Missing Markets: Public Goods 7 2.2 Externalities 11 2.2.1 Overview to Externalities 11 2.2.2 - 2.2.3 Negative Externalities 14 2.2.4 - 2.2.5 Positive Externalities 30 2.3 Information Failure 45 2.3.1 – 2.3.2 Insufficient and Inaccurate Information 45 2.3.3 Asymmetric Information 51 2.4 Factor Immobility 58 2.5 Market Dominance 63 3 Equity in Relation to Markets 66 3.1 Understanding the concept of Equity 66 3.2 Government Intervention to address Inequity 67 4 Decision-Making by Government 69 4.1 Summary of Government Policies 69 4.2 Government Failure 69 Learning Reflection and Annex 73

2 ©ACJC Econs Dept/2025/H2 Market Failure WHAT IS THIS TOPIC ABOUT? ● Due to the central economic problem of scarcity, resources need to be allocated in ways that bring about the most efficient outcome. ● In the free market, the price mechanism is the primary means by which resources are allocated and this would bring about efficiency in resource allocation. ● However, these conditions must be present for the price mechanism to bring about efficiency: o There are price signals to ‘direct’ resource allocation. o No third-party effects (externalities) in consumption or production o The market is perfectly competitive. o Perfect information in the market. o Perfect factor mobility. ● When any of these conditions are not met, resource allocation becomes inefficient (market failure). Markets may fail in term of: o Non provision of public goods o Under or over-consumption/production due to externalities. o Underproduction due to market dominance (H2 only). o Collapse of market or under/over consumption/production due to information failure. o Inefficiencies due to factor immobility. ● Due to these market failures as well as the issue of inequity, the government has to step in to correct them in order to achieve an efficient and equitable allocation of resources. However, due to various constraints, government intervention might fail, potentially leading to greater inefficiencies in resource allocation than those seen under free market forces. LEARNING OUTCOMES Enduring Understanding (students can explain and apply to real world): ● Price mechanism can fail to allocate resources efficiently and equitably. NOTE: Inequity is a distributional issue and not considered a source of market failure. ● Government has to make decisions on how to intervene in markets to correct market failure in order to achieve efficient and equitable allocation of resources. ● However, even with government intervention, the intended outcomes may not be achievable due to constraints in policy implementation, uncertainty of policy effects, and u