Define market failure and give two examples in which this may occur.

Market failure can be defined as the mis-allocation of resources in a market. Complete market failure occurs when no good or service is provided resulting in the nonexistence of a market. Partial market failure occurs when there is a sub-optimal allocation of resources. Monopolies represent a case in which market failure may occur. A monopoly can be defined as a firm that is the sole provider of a good or service in a market. A monopoly can cause market failure as they lack the incentive to innovate and increase productivity overtime resulting in higher prices for consumers, furthermore, a monopoly may restrict the supply of a good in order to raise prices due to increased scarcity. A monopoly acts in this way as, because it is a private firm, its primary objective is profit maximisation, not consumer welfare. Another example of market failure can be seen with regard to public goods such as streetlights. Public goods are both non-rival and non-excludable, this means that once the good is provided you cannot stop further people from using the good, and that the consumption of the good by an individual is not diminished by the subsequent consumption of the same good by other individuals. Due to the free rider problem private firms would not provide public goods in the free market as they would not make a profit, the free rider problem being that once the good is provided there is no incentive for subsequent consumers to pay for it, as they cannot be excluded from consuming it.

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