2.9 Market Failure Flashcards
(13 cards)
Define Public Goods
goods that can be used by the general public, from which they will benefit
Define Merit Goods
goods which create a positive effect on the society and ought to be consumed more
Define External Costs
the negative impacts on society due to production or consumption of goods and services
Define External Benefits
the positive impacts on society due to production or consumption of goods and services
Define Private Costs
the costs to the producer and consumer due to production and consumption respectively
Define Private Benefits
the benefits to the producer or consumer due to production and consumption respectively
Formula for social costs
External costs + Private Costs
Formula for social benefits
External benefits + Private benefits
When does market failure occur?
when the price mechanism fails to allocate resources effectively
What are 3 causes of market failure?
- Social Costs exceed social benefits
- Over provision of demerit goods
- Lack of public goods
How does social costs exceeding social benefits cause market failure?
Negative externalities lead to misallocated resources and reduced societal welfare
How does over provision of demerit goods cause market failure?
This leads to over-consumption, a misallocation of resources, and reduced overall welfare
How does a lack of public goods cause market failure?
The free-rider problem means no one pays, so private firms won’t supply them. This leads to under-provision or lack of provision, a misallocation of resources, and reduced societal welfare
