Chapter 3 = Market Failure across the economy Flashcards Preview

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Flashcards in Chapter 3 = Market Failure across the economy Deck (13):

Merit goods

can be provided by the private sector and often are, but the quantity that the free market provides is lower than the optimum level for society. They are under provided by the market mechanism. Public sector action can remedy this.


a public good

is one that the free market will not provide at all. There is no incentive for a producer to supply it, it is impossible to charge for it and make a profit and it is impossible to prevent anyone else from consuming it for free.


non rivalrous

when one person consumes a public good it does not affect or reduce the amount left for someone else to consume.


non excludable

impossible to prevent people who have not paid for a public good from consuming it (free rider)


demerit goods

are over produced by the free market in quantities that are above the optimal level for society as a whole. They have bad effects on society and are likely to produce negative externalities such as health care needs, criminal activity and family breakdown


imperfect information

impairs the efficiency of markets because it leads to price distortions. Often buyers pay more than they need to


asymmetric information

occurs when either the buyers or sellers do not have full information. The party with the full information can benefit at the expense of the party without it.


the impact of market prices equalling private costs

this means prices of products with negative externalities will be lower than they should be causing more to be consumed (over-consumption). This distorts allocative efficiency and can have a negative impact on society.


indirect taxation of demerit goods

one way to provide an incentive to change behaviour is to alter the price. Indirect taxation refers to taxes that are added to selling prices eg VAT. Supply moves to the left meaning that price has increased and demand falls. The amount of fall depends on the price elasticity of the product.


tradable pollution permits

usually given as a way of reducing carbon emissions. The government issues restricted number of permits to the desired level of emissions. The fact that the permits have a value gives the owner a incentive to become more efficient. This system should encourage efficiency and reduce negative externalities.


reducing asymmetric information

modern technology can reduce asymmetric information on behalf of the consumer. We can now check prices and reviews before making decisions.
price comparison websites help. social media helps share information and pressure groups such as the consumer association to correct market failure.



simply refers to laws passed by government. By laws can be passed by local councils.



rules concerning what businesses can and cannot do. most regulations are imposed by governments. However, some industries and professions have their own rules. This is known as self-regulation.