1.3 Market failure Flashcards
(13 cards)
Market failure
Occurs when the market fails to allocate scarce resources efficiently, causing loss in social welfare.
Types of market failure
3 main types of market failure:
- Externalities
- Information gaps
- Non-provision of public goods
Other types of market failure:
- Monopoly
- Moral hazard
- Immobility of labour
- Speculation and market bubbles
Reasons for market failure
For resources to be allocated efficiently, it is necessary for marginal social costs to be equal to marginal social benefits.
Externalities
Costs and benefits to third parties who are not directly part of a transaction between producers and consumers.
Private costs/benefits
the costs/benefits to the individual participating in the economic activity.
Social costs/benefits
the costs/benefits of the activity to society as a whole.
External costs/benefits
the costs/benefits to a third party not involved in the activity.
Public goods
Are those goods that are non-rivalrous (amount available does not fall after one person’s consumption) and non-excludable (cannot prevent anyone from consuming them).
Example of public goods
- street lighting
- national parks
- nuclear defence systems
Free rider problem
Once a product is provided, it is impossible to prevent people from using it and, therefore, impossible to charge for it.
Other people will be able to benefit from it without paying.
Symmetric information
Where both parties in a transaction have the same information.
Asymmetric information
Where one party in a transaction has more or superior information compared to another.
Examples of asymmetric information
- Housing market
- Life insurance
- Second-hand car sales
- Financial services
- High-tech products
