Lecture 2: Market failures, the role of institutions and governments Flashcards
(18 cards)
Why are social entrepreneurs needed?
To address social and environmental problems that companies, governments, and NGOs cannot effectively tackle.
Social entrepreneurs fill gaps in service delivery and innovation where traditional institutions fall short.
What creates social and environmental problems and opportunities for social entrepreneurship?
Market failure and institutional voids.
These failures can lead to unmet social and environmental needs.
What is market failure?
The failure of an idealized system of price-market institutions to sustain desirable activities or stop undesirable activities.
It occurs when the production or allocation of goods or services is suboptimal.
What are the types of market failures?
- Externalities (negative & positive)
- Imperfect information
- Inefficient firms
- Inappropriate government intervention
Each type can lead to social and environmental issues.
Define externalities.
A cost or benefit arising from any activity that does not accrue to the person or organization carrying on the activity.
Externalities can be either negative or positive.
What are negative externalities?
Consequences of harmful practices that are not reflected in the price, causing third parties to bear the costs.
Examples include pollution and health effects.
What are positive externalities?
Third parties benefit from the production or consumption of goods/services without paying the costs.
An example is vaccinations benefiting society by reducing disease spread.
What causes negative externalities?
- Weak government regulation
- Ambiguous property rights
These factors lead to harmful practices not being accounted for in market prices.
What is imperfect information?
A situation where producers or consumers lack complete information, leading to suboptimal decisions and potentially environmental degradation.
This can prevent consumers from making informed choices.
What are institutional voids?
Situations where absent or weak institutional arrangements prevent those excluded by poverty from participating in market activities.
They can create opportunities for social entrepreneurs.
What are examples of institutional voids?
- Labor market voids
- Capital/financial market voids
- Product market voids
Each void can hinder economic and social development.
What is the role of institutions in markets?
They serve as specialized intermediaries that support and facilitate business activities.
Well-functioning institutions are crucial for economic development.
What is ‘bounded rationality’?
The idea that economic actors make decisions that satisfy rather than optimize due to limited information.
This concept challenges the notion of rational choice in economics.
What does the term ‘bricolage’ mean in the context of entrepreneurship?
Making do with whatever resources are available to address institutional voids.
It emphasizes creativity and resourcefulness in entrepreneurial strategies.
What is the impact of inefficient firms on the environment?
They cause inefficient resource utilization and economic waste, leading to environmental degradation.
An example includes the low recycling rates of aluminum in the US.
What is the significance of the Invisible Hand in economics?
It suggests that individuals pursuing their own interests will lead to overall economic welfare.
This principle, proposed by Adam Smith, is challenged by market failures.
Fill in the blank: Market failure occurs when the production or allocation of goods or services is _______.
[suboptimal]
True or False: All market failures are caused by government intervention.
False.
Market failures can also arise from factors like externalities and imperfect information.
