Economic efficiency is maximised when one individual can be made better off, without making another worse off. This implies that suppliers are:

1. Productively efficient - they use all the resources available, and operate at the lowest cost possible.

2. Allocatively efficient - the goods produced are affordable, and therefore sold for the lowest possible price.

Factor Immobility - when a factor of production is not working to its full potential. For example:

Land is immobile because it requires planning permission and a lot of time.

Labour is immobile because of unemployment and lack of productivity or motivation.

Capital is immobile because of depreciation and lack of its use.

Enterprise is immobile because sometimes, risks don't always pay off.

Factor immobility is a form of market failure. For example, labour is not maximised because unemployment exists, which means that there are people who are not contributing to the economy but instead benefiting from welfare. The opportunity cost of this is that less money is spent on better alternatives such as education.

Imperfect Knowledge - Economic agents lack the necessary information to make rational decisions. For example:

The market underprovides merit goods such as education because it only seeks to make a profit and ignores the positive externalities to society.

Education provided by the state is free, and is therefore abused because some students ignore the private and external benefits.

Alcohol is a demerit good over-provided by the market, and over-consumed by consumers who ignore its private and external costs.

Therefore, imperfect knowledge is an example of market failure because economic agents ignore the external benefits of merit goods and external costs of demerit goods.

Wealth - This is the result of income, which is attained from 3 basic sources: Employment, Welfare and Investment.

There are 2 different forms of wealth:

Physical - Tangible possessions such as property, cars or jewellery.

Monetary - Monetary investments such as cash, bank accounts, shares and pensions.

There are 3 factors that can increase wealth:

Rising income from work.

Rising value of investments.

Wealth is an example of market failure because it is unevenly distributed.

	Created by Amardeep Kumar almost 10 years ago

A levels Economics (Module 1: Markets and Market Failure) Note on Economics 2 - Module 1 - Unit 3 & 4, created by Amardeep Kumar on 15/02/2015.