Definitions of market failure and government intervention Flashcards
Market Failure
When unfettered markets fail to provide the correct signals and incentives so resources fail to be allocated efficiently it results in social welfare not being maximised.
Externalities
Are third party effects, they are the consequences felt outside of the market i.e. by those other than the decision maker. They are the divergence between private and social costs and benefits. They can be wanted (positive) or unwanted (negative)
Private costs
Are felt only by the decision makers (first and second parties). They are the consequences received outside of the market. They are social costs minus negative externalities.
Social costs
Are felt by the whole of society (first, second and third parties). The addition of private and external costs.
Cost benefit analysis
Is most commonly used when referring to the decision making process of governments over major projects. It generally considers the social costs and benefits using money as a measure of value. That is it includes private costs and benefits and externalities.
Time preference
The idea that people would rather have things sooner than later. It requires future cost and benefits to be converted into their present values through discounting for accurate comparison.
Public goods
Things that can be consumed by everybody in a society, or nobody at all. They are characterised by non-excludability and non-rivalry.
Non-excludability
Goods cannot be confined to those who have paid for it. Once the good is provided Non-payers can free ride.
Free riding
The ability to consume a good without having to pay for it
Non-rivalry
Consumption by one person does not reduce the availability or the utility received of the good to others.
Valuation problem
Since public goods are not traded they do not have a market determined price. This makes it difficult for the government to measure the benefits that consumers receive in consuming the goods and therefore makes it difficult for the government to decide how much of the public good to provide.
Asymmetric information
Agents on one side of the market have much better information than those on the other side.
Adverse selection
When you choose to do business with people you would be better off avoiding, often caused by asymmetric markets.
Regulations
These are legal constraints that set standards for the consumption or for the production of goods or their externalities.
Maximum prices
A price ceiling normally set by law. To have an effect it must be set below the market clearing price.
