1.3 Market Failure Flashcards
(13 cards)
What are the 3 main types of Market Failure?
- Externalities
- Under-provision of public goods
- Information Gaps
What is an Externality?
An externality is the cost or benefit a third party receives from an
economic transaction outside of the market mechanism. In other words, it is the spillover effect of the production or consumption of a good or service.
What is Under-Provision of public goods?
Public goods are non-rivalry and non-excludable, meaning they are underprovided by the private sector due to the free-rider problem. The market is unable to ensure enough of these goods are provided.
-One of the best examples of a public good is streetlights
What are Information Gaps?
Economic agents do not always make rational decisions and so resources are not allocated to maximise welfare. For example, consumers do not know the quality of second hand products, such as cars, and pension schemes are complex so it is difficult to know which one is best.
What is Homo Economicus?
The term Homo economicus is the portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally.
What are Public Goods?
Non-rivalrous and non-excludable
What are Private Costs/Benefits?
Private costs/benefits are 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?
Social costs/benefits are the costs/benefits of the activity to society as a whole.
What are external Costs/Benefits?
External costs/benefits are the costs/benefits to a third party not involved in the economic activity. They are the difference between private costs/benefits and social costs/benefits.
What are the parts of STRIPS?
Subsidise
Tax
Regulate
Inform
Pollution Permits
State Control
What is the Free-Rider Problem?
This says that you cannot charge an individual a price for the provision of a non-excludable good because someone else will gain the benefit from it without paying anything. A free rider is someone who receives the benefits without paying for it.
What is Symmetric Information?
Symmetric information occurs where buyers and sellers have potential access to the same information; this is perfect information.
What is Asymmetric Information?
Asymmetric information is when one party has superior knowledge compared to another.
