chapter 14 - market failure Flashcards
(35 cards)
What is market failure?
When the market fails to allocate resources efficiently or fairly
What are common causes of market failure?
Externalities, information failure, public goods, monopoly power, and immobility of resources
What are externalities?
Side effects of economic activities affecting third parties
What are negative externalities (external costs)?
Harmful side effects like pollution, leading to overproduction
What are positive externalities (external benefits)?
Beneficial side effects like education, leading to underproduction
Why do externalities cause market failure?
Prices do not reflect the full social costs or benefits
Give one example each of a positive and a negative externality.
Positive - vaccination
Negative - factory pollution
What is information failure?
When economic agents lack full or accurate information
How does information failure cause market failure?
It leads to poor decision-making, like overconsumption of harmful goods
What is asymmetric information?
When one party has more or better information than the other
Give an example of asymmetric information.
A seller hiding defects in a used car
What are merit goods?
Under-consumed goods that benefit society, like education
What are demerit goods?
Over-consumed goods that harm individuals or society, like tobacco
Why are merit goods under-consumed in a market economy?
Consumers may not recognise their full benefits
Why are demerit goods over-consumed in a market economy?
Consumers may ignore or underestimate negative effects
What are public goods?
Goods that are non-excludable and non-rivalrous
What does non-excludable mean?
No one can be prevented from using the good
What does non-rivalrous mean?
One person’s use doesn’t reduce availability to others
Give two examples of public goods.
National defense and street lighting
Why are public goods not provided by the market?
Due to the free-rider problem - no incentive to pay for them
What is monopoly power?
When a firm can influence market prices due to lack of competition
How does monopoly power lead to market failure?
It can result in high prices, restricted output, and poor quality
What is one solution to monopoly power?
Government regulation or enforcing competition laws
What is occupational immobility?
When workers can’t switch jobs due to lack of skills or training
