1.3 Flashcards
(17 cards)
When does market failure occur?
When there is a misallocation of resources in the market
What are the types of market failure?
Externalities
-the cost or benefit a third party receives from an economic transaction
-This will lead to the over or under production of a good or service, meaning resources aren’t allocated efficiently
Under provision of public goods
-Public goods are non-rivalry and non-excludable so they are under provided by the private sector due to the free rider problem.
Information gaps
-Economic agents don’t always make rational decisions so resources aren’t allocated to maximise welfare because they don’t have all the information
What are merit and demerit goods?
Merit good is a good with external benefits where the benefit to society is greater than the benefit to the individual. Tend to be under provided
Demerit good is a good with external costs, where the cost to society is greater than the cost to the individual. Tend to be over provided
What is MPB (Marginal Private Benefit)?
the extra satisfaction gained by the individual from consuming one more than a good
What is MSB (Marginal Social Benefit)?
the extra gain to society from the consumption of one more good
What is MPC (Marginal Private Cost)?
the extra cost to the individual from producing one more of the good
What is MSC (Marginal Social Cost)?
the extra cost to society from the production of one more good
When does a negative externality occur?
When social costs are greater than private costs
When does a positive externality occur?
When social benefits are greater than social costs
Ways the government can intervene to ensure the market considers external costs and benefits
-Indirect taxes and subsidies - taxes can be put on goods with negative externalities and subsidies can be put on goods with positive externalities
-tradable pollution permits - allow firms to produce up to a certain amount of pollution and can be traded amongst firms
Regulation - This could limit the consumption of goods with negative externalities
Two features of public goods
non-rivalry - one person’s use of the good doesn’t stop someone else from using it
non-excludable - you can’t stop someone from accessing the good and someone cannot choose to access the good
Example of public good
Streetlights
What are quasi-public goods?
Goods which aren’t perfectly non-rivalry and non-excludable but aren’t perfectly rivalry and excludable
What is the free rider problem?
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What is symmetric information?
Occurs where buyers and sellers have potential access to the same information
What is asymmetric information?
When one party has superior knowledge compared to another
-Advertising causes information gaps because it is designed to change attitudes of the consumer to encourage them to buy the good
What is the principal agent problem?
When the goals of the principle are different from the agents
