Market Failure Flashcards
What causes market failure?
When the Free Market fails to allocate resources efficiently, MSB ≠ MPB, MSC ≠ MPC (the market is not at its socially optimum point)
What is an ‘Externality’?
The impact on a third party (usually society) outside of a private transaction
E.g The impact on society of people buying cigarettes
What is a negative externality?
When the marginal social cost is greater than the marginal private cost. There is a negative impact on the third party due to the overconsumption of a (usually demerit) good
What is a positive externality?
When the marginal social benefit is greater than the marginal private benefit. There is a negative impact on the third party due to the underconsumption of a (usually merit) good
How can a government solve a negative externality?
- Ad Valorem Tax (+%)
- Flat Tax (+£x)
- Minimum Pricing
- Maximum Pricing
How can a government solve a positive externality?
- Subsidies
- Consumer Incentives
What are the characteristics of a public good?
- Non Rival
- Non Excludable
- Non Rejectable
E.g A Street Lamp
Why do governments tend to provide public goods?
- Would not be produced by the private sector due to no profit incentive
- Free Rider problem
What does non-excludability mean?
Benefits derived are not confined to those who pay for it
What does non-rivalry mean?
Consumption of a good from one individual does not limit consumption of a good from another
