1.3 Market Failure Flashcards
(19 cards)
What are the three types of market failure?
1)Externalities
2)Under provision of public goods
3)Information gaps
What are externalities?
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
What are public goods?
Public goods are non-rivalry and non-excludable
What are private costs/benefits?
The costs/benefits to the individual participating in the economic activity. The demand curve represents private benefits and the supply curve represents private costs.
What are social costs/benefits?
The costs/benefits of the activity to society as a whole.
What are external costs/benefits?
The costs/benefits to a third party not involved in the economic activity.
What is a merit good?
A good with external benefits, where the benefit to society is greater than the benefit to the individual. These goods tend to be under provided by the free market.
What are demerit goods?
A good with external costs, where the cost to society is greater than the cost to the individual. They tend to be over-provided by a free market.
How do negative production externalities occur?
When social costs are greater than private costs?
How do positive consumption externalities occur?
When social benefits are greater than private benefits.
What are the five ways the government can intervene to ensure the market considers the external costs and benefits?
1)indirect taxes and subsidies
2)pollution permits
3)provision of the good(provide the good through taxation)
4)provision of information
5)regulations(limit consumption of goods with negative externalities)
What does the free rider problem state?
You cannot charge an individual a price for the provision of a non-excludable good.
What is a free rider?
Someone who receives the benefits without paying for it.
What is symmetric information?
This is perfect information that both buyers and sellers have potential access to.
What is asymmetric information?
When one party has superior knowledge compared to another. Usually, the seller has more information than the buyer meaning they can take advantage of the other party’s lack of knowledge and charge higher prices.
How does market failure occur?
When the market is unable to efficiently allocate scarce resources to meet the needs of society.
How does complete market failure occur?
When there is no market whatsoever?
How does partial market failure occur?
When a market exists but there is a misallocation of resources?
