1.3 Market Failure Flashcards
(31 cards)
What is market failure
When the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss�
What are externalities
Externalities are those costs or benefits which are external to an exchange. They are third-party effects ignored by the price mechanism.
What external costs
Negative third-party effects outside of a market transaction
What are private costs
These are costs internal to the firm, which it pays for directly. which are therefore taken into account by the price mechanism
What are social costs
Social costs The sum of external costs and private costs from a market transaction
What are external benefits
Positive third party effects outside of market transaction
What are private benefits
Consumers are only concerned with private benefits or from consuming a good or service. Private benefits ma also refer to the revenue that a firm obtains from selling a good or service
What are social benefits
The sum of external benefits and private benefits from a market transaction
What is market equilibrium
Where marginal private benefits equals marginal private costs
What is the social optimum
Where marginal social benefits equals marginal social costs
What is the triangle of welfare lost and how does it occur
This leads to there being an excess of social costs over social benefits. This occurs when external costs are ignored
What is the triangle of welfare gain and how can this occur
This is where the marginal private benefits are converted into the marginal social benefits. This can occur when the external benefits are ignored
What is the impact of external costs on the consumers and producers (6)
Overproduction
Underpricing
Welfare loss
Concerns over availability of resources for future generations
Concerns over pollution levels
Calls for government intervention to internalise external costs and so correct market failure
What is the impact of external benefits on consumers and producers (5)
Underproduction
Underpricing
Potential welfare gain
Concerns over the longe term implications of underproduction
Calls for government intervention to internalise the external benefits and so correct market failure
What are public goods
Those goods that have non-rivalry and non-excludability in their consumption. These are often shared by many memebers of the public
What does it mean if a good has non-excludability
Once this good has been produced for the benefit of once person it is impossible to stop others from benefiting
What does it mean if a good has non-rivalry
Means that as more people consume this good, it does not reduce the amount available for others. S
What are quasi public goods
These are goods which may show qualities of public good some of the time but otherwise there can be competition
What are private goods
Those goods that have rivalry and excludability in their consumption
What is the free rider problem
In a free market economy public goods are under provided as if they are made for one person then they are availed for everyone consumption. The market fails as it is not possible for the firm to refuse the goods to those who are not willing to pay for them. R
What is the reason for the free rider problem
It is rational for the consumer to wait for someone else to pay for the good and reap the rewards of consumption. If everyone waits for someone else to pay for the good then it may never be provided.
What is the solution of the free rider problem
The government provides public goods through general taxation
What are information gaps
Where consumers, producers or the government have insufficient knowledge to make rational economic decisions
How can producer knowledge exceeding consumer knowledge effect the market
This causes fear of consumers paying too much for poor quality car. Which causes the whole market to decrease in price making both consumers and producers the loser depending on the car sold
