1.3. Market Failure Flashcards
(22 cards)
Define market failure.
When the market fails to allocate scarce resources efficiently, causing a loss in social welfare.
List the three main types of market failure.
Externalities, under-provision of public goods, and information gaps.
What is an externality?
The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
Why are public goods underprovided by the private sector?
Due to the free-rider problem.
What are the characteristics of public goods?
Non-rivalry and non-excludability.
What is asymmetric information?
When one party has superior knowledge compared to another.
Define private costs and benefits.
The costs/benefits to the individual participating in the economic activity.
Define social costs and benefits.
The costs/benefits of the activity to society as a whole.
Define external costs and 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.
What is a demerit good?
A good with external costs, where the cost to society is greater than the cost to the individual.
Define marginal private benefit (MPB).
The extra satisfaction gained by the individual from consuming one more of a good.
Define marginal social benefit (MSB).
The extra gain to society from the consumption of one more good.
Define marginal private cost (MPC).
The extra cost to the individual from producing one more of the good.
Define marginal social cost (MSC).
The extra cost to society from the production of one more good.
When do negative production externalities occur?
When social costs are greater than private costs.
When do positive consumption externalities occur?
When social benefits are greater than private benefits.
List ways the government can intervene to address externalities.
Indirect taxes and subsidies, tradable pollution permits, provision of the good, provision of information, regulation.
Why does the government provide public goods?
Because the market would fail to provide them due to the free-rider problem.
What is the free rider problem?
Someone receives the benefits of a good without paying for it.
What is symmetric information?
Where buyers and sellers have potential access to the same information.
How do information gaps lead to market failure?
There is a misallocation of resources because people do not buy things that maximise their welfare.
