Market Failure Flashcards
(30 cards)
Negative externalities
Spill-over costs borne by third parties who are not directly involved in the consumption or production of the good itself without compensation
Government intervention correcting NE
Indirect tax, laws & regulations, ban, marketable pollution permits, promoting substitute markets via subsidies, public education & campaigns
Indirect tax
Forces consumer/firm to internal is the external cost by imposing a tax = MEC incurred at Qs
Laws & regulations
Reduces output or external costs
e.g. no smoking in certain areas
Total ban
Outright restriction of output where quantity produced is now 0
Marketable pollution permits
“Cap-&-trade”
If pollution can be easily monitored & polluters easily identified, may implement this to reduce pollution
Promoting substitute markets via subsidies
May promote alternative market to correct NE. Incentive-based approach
Public education & campaigns
Convinces public to consume less/producers to switch their methods/produce less
Positive externalities
Spill over benefits enjoyed by third parties who are not directly involved in the consumption or production of the good or service itself, without payment
Government Intervention to correct Positive Externalities
Subsidies, direct provision, joint provision, legislation, public education & campaigns
Subsidies (PE)
Lower MPC -> encourage greater consumption/production
Direct provision at zero price/free provision
Government could directly provide goods/services at socially efficient quantity (Qs) & at 0 price/free. Or pay firms to provide at Qs. e.g. vaccines
Legislation
Laws -> compel -> up to socially efficient output Qs.
For goods with external benefits, government could increase consumption/production.
Public education & campaigns (PE)
-> convince to consume goods with PE
Merit goods
Deemed by the government to be desirable for consumption & under-consumed when left to the free market
Demerit goods
Deemed by the government to be undesirable for consumption & over consumed when left to the free market
Product complexity
information provided may be too complex for consumers to comprehend
Persuasive Advertisements & Misinformation
Presence of highly persuasive advertisements -> over-estimate PB -> over-consumption
User inexperience
Taking into account only purchase price -> underestimate true cost over time.
e.g. considering cost of car & not monthly expenses for cars like car loans
Addiction
Attentional biases for substance-related stimuli. Attentional bias & craving = mutual relationship, increase in one -> increase in other
May overestimate actual benefits & underestimate actual costs
Asymmetric information
Situation where one party in an economic transaction has more information than the other party. When former decides to exploit the latter, may result in the problems of adverse selection & moral hazard.
A subset of imperfect information
Adverse selection
Arises when certain parties naturally select themselves out of a market, giving rise to missing markets where these parties do not get to buy or sell the good even though it may be beneficial for them to do so
Screening
Economic agents gathering information to make the right decision
Signalling
Sellers’ tempt to reveal credible information about what they have to sell in order to make themselves more attractive to a buyer
