1.3 Market Failure Flashcards
(17 cards)
Externalities
The spill over effects from production or consumption on third - parties without appropriate compensation being paid.
Complete market failure
When the market does not supply products at all.
Merit Good
A good or service that has positive externalities from consumption
De-Merit Good
A good or service that has negative externalities from consumption
Information Gaps
when people have inaccurate or incomplete information and so make sub optimal choices.
Partial Market failure
Market exists but there is a misallocation of resources
Public Good
Goods that are non-rival and non-excludable in consumption.
Market failure
When the price mechanism leads to a misallocation of resources, leading to a net welfare loss.
What are the different causes of market failure?
- Externalities
- Under provision of public goods
- Information gaps
What does it mean if a good is non rival? Give an example.
You can use It without stopping others from using it. E.g. Radio
What does it mean if a good is non excludable? Give an example.
Everyone has access to it. E.g. A lighthouse.
What are quasi public goods? Give an example.
Goods/services which are semi non rival and semi non excludable. E.g. Toll roads
Private Costs
Costs faced by the producer or consumer directly involved in transaction.
Social Cost (MSC)?
Total cost to society of producing an extra unit.
MSC = MPC + MEC
External Cost (MEC)?
Cost to 3rd parties from production/consumption of an additional unit of output
Private Goods
Goods that are both excludable and rivalrous.
Why may public goods not be provided by the private sector?
- Public goods are non-excludable
- Therefore individuals can benefit without contributing to the cost
- E.g. street lighting
- Without being able to charge consumers, private firms can’t generate sufficient profit.
