market failure Flashcards
(47 cards)
market failure
inability to distribute resources efficiently/ fairly in a market to meet the demand
types of market failures
- Externalities
- Under provision of public goods
- Information gaps
- Monopolies
- Inequalities in the distribution of income and wealth
how are negative externalities formed
by the consumption of demerit goods
eg cigarettes
externality
cost or benefit to a 3rd party
spill over effect of the production or consumption of a good or service to another person
how are positive externalities formed
caused by the consumption of merit
goods
eg. recycling schemes
Two features of public goods
Non rival
Non excludable
Non rival
No competition
Non excludable
Everyone can use it, those that don’t pay can still benefit
what is the feature of quasi good
It is non rival up to a point
Information asymmetry
When the seller knows more than the buyer
Tragedy of the commons
Is overuse of a common resource
Without regulation individuals have no incentive to overconsume
private goods
excludable and rivalrous
why are pubic goods under provided
they are underprovided by the private sector due to the free-rider problem
marginal social cost
the total cost to society when producing one more unit of a good or service
marginal social benefit
the total benefit to society from consuming one additional unit of a good or service
marginal private cost
is the cost that a producer or consumer directly incurs when producing or consuming one additional unit of a good or service.
marginal private benefit
the additional satisfaction/utility that an individual receives from consuming one more unit of a good or service
negative in consumption diagram
2 lines going down MSC and MSB
1 line going up MPB=MSB
Describe negative externalities and provide examples
Negative externalities occur when the production or consumption of a good or service imposes a cost on third parties
- pollution from a factory
- noise pollution from a music venue
- second hand smoke
How do negative externalities affect market equilibrium?
Both consumption and production diagrams
In production the supply curve (MSC) shifts to the left of the marginal private cost (MPC) curve. Private meets Social benefit
In consumption the demand curve (MPB) shifts to the left of the marginal social benefit (MSB) curve
Define positive externalities and give examples
the production or consumption of a good or service provides a benefit to third parties
- (P) beekeeper benefiting from a farmer’s apple trees (production) providing nectar
- (P) vaccination programs
- education and training for workers
- (C) seatbelts
Explain how positive externalities influence resource allocation
Positive externalities can lead to underproduction of goods or services because the benefits to third parties are not reflected in the market price (free rider problem)
resulting in a market equilibrium that is lower than the socially optimal level
How do externalities contribute to market failure?
Externalities contribute to market failure by causing a divergence between private costs/benefits and social costs/benefits, leading to inefficient resource allocation and potential overproduction or underproduction of goods and services.
Describe the relationship between the Marginal Social Cost (MSC) and the Marginal Private Cost (MPC) in externality diagrams.
The Marginal Social Cost (MSC) curve shifts to the right of the Marginal Private Cost (MPC) curve, indicating that the total cost to society of producing one more unit includes both the private costs and any external costs.
