1.3 Market Failure Flashcards
(8 cards)
What is market failure
Occurs when the market is unable to efficiently allocate resources to meet the needs of society.
It is then the role of the government to try to eliminate market failure. (through intervening in markets, government intervention)
What is complete VS partial market failure
Complete: Occurs when there is no market whatsoever. Goods and services will not be supplied to the market as firms will not receive revenue for supplying the product.
Partial: Occurs when a market exists but there is a misallocation of resources. Goods and services will be supplied but in the wrong amounts
What are the 2 types of externalities and their formulas
Externalities: Costs and benefits to a third party created by economic agents when undertaking their cetivities
Positive - Benefits to a third party that are not included in the price of the economic activity.
Social Benefits = Private benefits + External Costs
Negative - Costs to a third party that are not included in the price of the economic activity.
Social Costs = Private Costs + External Costs
What is marginal utility
The change in satisfaction from consuming an extra unit of a good or service. Beyond a certain point, marginal utility may start to diminish. If it becomes negative, then consuming an extra unit will cause total utility to fall.
What is Marginal Private Cost (MPC) that represents supply in externalities diagrams
VS
What is Marginal Private Benefit (MPB) that represents supply in externalities diagrams
MPC: Is the cost to producers of producing an additional unit.
MPB: The additional amount of satisfaction that a consumer gains from an additional unit of a good or service.
What are public goods and the 2 types
Public: Is a commodity, product or service that is both non-excludable and non-rivalrous and which is typically provided by a government and paid for through taxation. It’s use by an individual does not stop others from using it whilst it’s consumption does not reduce the amount available for consumption by others.
Non-rival goods: Where consummation of the good does not reduce the amount available for consumption by others.
Non-excludable goods: Where once provided, it is impossible to stop other individuals from using them.
What are the 2 types of private goods and quasi public goods
Rival goods: Where consumption of the good reduces the amount available for others.
Excludable goods: Where once provided it is possible to stop other individuals from using them.
Quasi-public goods: Private goods which have some characteristics of public goods.
What us symmetric VS asymmetric information
Symmetric: In a perfectly competitive market, all buyers and sellers would have the same access to knowledge and information. Assuming that both parties act rationally then perfect information would lead to a perfect allocation of resources.
Asymmetric: In most cases in reality the buyer and seller will have unequal knowledge when making economic transactions and this leads to a misallocation of resources.
