All of market failures Flashcards
(19 cards)
What is a market failure?
When the free market fails to allocate scarce resources at the socially optimum level of output
What are examples of market failures?
- Negative or positive externalities
- Demerit and merit goods (information failures)
- public goods (free rider problem and profit motivated firms)
- common access of resources
- income inequality
-monopoly power
-factor immobility
What is the difference between MSB and MPB?
MSB (Marginal Social Benefit) is the total benefit to society from consuming one more unit, while MPB (Marginal Private Benefit) is the benefit received by the individual consumer.
Difference between the MSC and the MPC
MSC (Marginal Social Cost) includes all costs to society, while MPC (Marginal Private Cost) only includes costs to the producer.
What is a negative externality?
3rd parties effect as a result of the actions of production or consumption
Example of a positive externality
Education — benefits not just the individual but also society (higher productivity, lower crime)
Example of a negative externality
Driving petrol cars — causes air pollution, harming others’ health without compensation
What is an information failure?
happens when consumers or producers don’t have full, accurate knowledge.
What is asymmetric information?
When either the buyer or the seller has greater information than the other during an economic transaction (think car dealerships)
What is Akerlof’s “Market for Lemons” theory?
In second-hand markets (like used cars), sellers know more about the product’s quality than buyers.
Buyers fear getting a “lemon” (bad car), offer lower prices, and sellers of good cars leave the market.
This lowers the quality of second hand carse so reduces offering prices further. This can create cycle causing a market collapse, as only poor-quality goods remain.
How does behavioural economics explain market failure?
People are not always rational — they suffer from bounded rationality (limited ability to process info) and cognitive biases (like short-termism).
This can lead to over-consumption of harmful goods (e.g., smoking) and under-saving (e.g., for pensions), causing market failures.
What are property rights and how do they solve market failures?
property rights refer to the legal ownership and control over resources or goods, they create incentives not to exploit common access of resources and internalise negative externalities solving market failures.
What are the limitations of property rights?
Hard to efficiently distribute and enforcement would be needed which is costly. Problem of equity and who gets rights.
What are some examples of property rights?
1) Land rights
2) preventing the tragedy of commons
3) Rights to own a business
4) poaching
Benefits of property rights?
1) Protected rights stimulate investment such as farmland
2) protect the environment (fights deforestation)
3) Protection of intellectual property promotes rewards for research and development
4) gender empowerment
What is tragedy of the commons?
Metaphor used to illustrate the potential conflict between the individual self interest of producer and consumers and the common or public good
What is a common pool resource?
Good or service that have characteristics of rivalry in consumption me non excludability (grazing land or fish stocks). The over exploitation of common resources can result in tragedy of the commons
What is Pareto optimally and how can be applied?
Pareto optimality states it is impossible to make an individual better off without making someone else worse off.
E.g. NHS could reallocate staff or funding to reduce waiting times in high demand areas without cost cutting is a Pareto improvement
How can lack of property rights lead to market failure
1) tragedy of commons - when no one owns resources e individual over use not bearing the full cost of depletion
2) Pollution
