1.3 Market Failure Flashcards
(22 cards)
What is market failure?
Market failure occurs when the market fails to allocate scarce resources efficiently, causing a loss in social welfare.
What are the three main types of market failure?
- Externalities
- Under-provision of public goods
- Information gaps
Define externality.
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
Give an example of a negative externality.
Cars and cigarettes.
What is a public good?
Public goods are non-rivalry and non-excludable goods that are underprovided by the private sector.
What is the free-rider problem?
The free-rider problem occurs when individuals can benefit from a good without paying for it, making it unprofitable for private producers.
What does ‘Homo economicus’ assume?
Homo economicus is assumed to have perfect information to make rational decisions.
What are private costs/benefits?
Private costs/benefits are the costs/benefits to the individual participating in the economic activity.
What are social costs/benefits?
Social costs/benefits are the costs/benefits of the activity to society as a whole.
What is a merit good?
A merit good is a good with external benefits, where the benefit to society is greater than the benefit to the individual.
What is a demerit good?
A demerit good is a good with external costs, where the cost to society is greater than the cost to the individual.
What is the marginal private benefit (MPB)?
The marginal private benefit is the extra satisfaction gained by the individual from consuming one more of a good.
What is the marginal social cost (MSC)?
The marginal social cost is the extra cost to society from the production of one more good.
What happens when there are negative production externalities?
Social costs are greater than private costs, leading to a loss of welfare.
How can the government intervene to address negative externalities?
- Indirect taxes
- Subsidies
- Tradable pollution permits
- Provision of goods
- Provision of information
- Regulation
What is the characteristic of non-rivalry in public goods?
One person’s use of the good doesn’t stop someone else from using it.
What does asymmetric information mean?
Asymmetric information occurs when one party has superior knowledge compared to another, usually the seller has more information than the buyer.
What is the impact of information gaps on market failure?
Information gaps lead to misallocation of resources because people do not buy things that maximize their welfare.
Fill in the blank: A good example of a public good is _______.
streetlights.
True or False: Public goods are always provided by the private sector.
False.
What is the role of government in providing information related to externalities?
The government can provide information to help people make informed decisions and acknowledge external costs.
What are some examples of information gaps?
- Drugs
- Pensions
- Financial services
