Market failure Flashcards
(38 cards)
1
Q
define market failure
A
occurs when market fails to allocate scarce resources efficiently
= causes a loss in social welfare
2
Q
causes of market failure
A
- externalities= firms follow self interest and ignore social costs
- underconsumption of public goods
- info failure on de-merit goods
- income inequality
- monopoly power= one dominant seller exploits consumers with high prices and low quantity
3
Q
define complete Market failure
A
- occurs when market doesn’t provide good or service even though there’s demand for it
= market unable to function in any capacity
= lead to total absence of supply e.g. public goods
4
Q
define partial market failure
A
occurs when market provide goods or service but very inefficiently
= usually caused by externalities or info failure
= overproduce or consume de-demerit goods
- may require corrective measures like tax or regulations
= e.g. CO2 taxes address pollution by forcing producers to internalise social cost of environmental damage
5
Q
describe public goods
A
- non rivalrous
= Q of good doesn’t decrease after consumption e.g. traffic light - non excludable
= no price can be charged for good
= benefits of consumption can’t be confined to individual that paid for it
= can’t stop someone accessing it= no efficient way to price good - beaches, roads and street lights
6
Q
describe free rider problem
A
can’t charge individual for consumption of public good as someone else will gain the benefit wo paying anything= its non-excludable
= someone gets benefit wo paying= ppl wait for others to pay and gain benefit after
= w that incentive no one will pay for public goods= no private motive to supply them= no chance for profit
= create missing market
= complete market failure
7
Q
define private good
A
goods that are rivalrous and excludable
= others can’t use them
8
Q
define quasi-public good
A
goods that sometimes show characteristics of public goods but also excludable or rivalrous at times
= roads= have toll taxes and congestion charges
9
Q
describe tragedy of commons
A
- where lack of private ownership leads to unsustainable exploitation of natural resources leading to depletion of resources
= e.g. sea provides seafood and trees provide paper= no one can claim - caused by self interest
= driven by profit motive= even if one firm stops exploring another firm will use resource to own adv
= nothing left for firm that stopped= only one that will lose out
= leads to resources depletion and low income for future generations
10
Q
describe Neg Externalities Production
A
- costs to 3rd parties as a result of actions of producers
= air pollution as a result of producing metals, cancer as result of air pollution etc - MSC>MPC
- firms ignore social costs due to self interest= produce @ private optimum
= leads to over production and consumption - price is too low @P1= incentivise consumption of goods
= exaggerate over consumption issues
= lead to misallocation of resources
11
Q
describe Negative Externalities Consumption
A
- costs to 3rd parties as a result of consumption
= smoking= by standers inhale smoke and risk lung cancer, fast food= high costs to treat obesity - MSB<MPB
- consumers only consider private benefits due to self interest
= over consumption and production
= misallocation of resources
= allocative inefficiency and welfare loss
12
Q
describe positive externalities consumption
A
- benefits to 3rd parties as a result of the actions of consumers
- healthcare vaccine against the flu= less risk of others getting the flu, education makes more productive workers= higher tax rev
- MSB>MPB
- underconsumption of resources= allocative inefficiency
= @Q1, MSB higher than MSB= losing out on SB if Q* units not produced - individual consumers ignore full MSB of actions
13
Q
describe positive externalities production
A
- benefits to 3rd parties as a result of the actions of producers
- in-work training schemes= 3rd party would be other firms who are able to poach workers w skills gained from schemes they didn’t have to pay for= low COP
- MSC<MPC
14
Q
adv of property rights
A
- only the producer who owns land will suffer if resources are exploited
= NE internalised
= incentivises private producer to protect land and if property rights enforces, can sue anyone who trespasses
= properly protect land
= decrease mass depletion, deforestation etc
= allocative efficiency= welfare max and fix heart of market failure
15
Q
disadv of property rights
A
- can’t efficiently distribute property rights e.g. sea, air etc
- costly to enforce properly
= if not properly enforced risk of mass trespassing= OC - equity issues of who gets rights
= whoever gets them has dominating position in market
16
Q
define merit goods
A
goods deemed more beneficial to consumers than they realise
= normative consideration
17
Q
causes of merit good market failure
A
- asymmetric info= exists but not shared equally to consumers and producers or may not be clear or present
- e.g. ppl understand generic benefit of education but don’t know much much income exactly they’ll make
= lead to irrational decisions and under-consumption in free-market
18
Q
define de-merit good
A
goods deemed more harmful to consumers than they realise
= info failure doesn’t show full extent of LR issues caused by consumption
= lead to irrational decisions of over-consumption
19
Q
describe asymmetric info failure for employees
A
- employer has info of demand for labour and skills needed but employee knows full extent of individual skills, experience etc
= employee needs this detailed info when considering employment and can make decision to employ worker
= may not max potential benefits of employing
20
Q
describe second-hand info failure
A
seller has perf info of good
= may not tell buyer everything
= cld make irrational decision of purchasing good
= won’t max consumer utility
21
Q
define asymmetric info
A
when one party in a transaction has more or better information than the other
22
Q
define imperfect info
A
When information is missing or inaccurate
= e.g. a buyer may not know the risk involved in purchasing a financial asset
23
Q
effects of asymmetric info
A
- result in moral hazard= individual takes on more risk than usual as it doesn’t bear the full cost of risk e.g. if driver takes on car insurance, more likely to drive riskier
24
Q
define price discrimination
A
- where a firm charges different prices to different consumers on an identical good/ service with no differences in COP
- firm must have enough info to separate market and identify different elasticities of demand per group
- must be able to prevent re-sale of a good that could be sold @ lower price level= prevent market seepage
- must have price making ability= monopoly power
25
describe 1st degree price discrimination
- where consumers charged exact price they're willing and able to pay
= erode all consumer surplus in market and instead turn it into monopoly profit
26
describe 2nd degree price discrimination
- when a firm with fixed capacity like train with seats or hotel rooms etc may lower last minute prices in order to fill capacity and contribute towards their fixed COP
- would max profit @ Q1 where MC=AR
= would leave excess capacity= no profit made for fixed COP
- would decrease to P2 last min in order to fill all capacity @ AR=MC
= create consumer surplus for consumers paying lower P2
27
describe 3rd degree price discrimination
- when firm segments market into diff price elasticities of demand based on age, income, geographical area etc
= inelastic consumers like commuters on railways are more willing and able to pay higher price
= elastic consumers who use train for leisure are less willing to pay higher prices= charged lower prices
- MC is constant= to fill one more train seat, cost is the same each time
- by charging diff prices to diff consumers, firms are maxing joint profits
28
adv price discrimination
- higher profits made by firms= higher re-investment and dynamic efficiency
- higher Q produced in 2nd and 3rd degree
= higher EoS benefits and lower P for consumers in LR
- some consumers like 2nd and 3rd degree benefit from lower prices in price elastic sector
29
disadv of price discrimination
- allocative inefficiency= charge prices beyond MC= exploit consumer
- 1st degree and inelastic 3rd degree exploit with higher prices
= can be regressive on consumers with lower incomes
= widen income inequality in society
- anti-competitive price nature
= 3rd degree elastic segment have lower prices
= may drive out and decrease comp
= firm will be left with pure monopoly power
30
how to fix free rider problem
- charge compulsory taxes to fund collective provision of services like national defence
- appealing to people's altruism and sense of social purpose
= incentivise voluntary donations
- community solutions to create social norms to manage common pool resources like grazing land
- impose gov legislation= enforceable regulations in law like fishing quotas decrease tragedy of commons free rider problem
31
define property rights
theoretical and legal ownership of resources and how they can be used
= resources can be tangible (land) or intangible (Intellectual Property)
= can be owned by Govs, individuals or firms
32
why are property rights important
- legal protected rights can act as catalyst to stimulate investment in capital of farm machinery etc= would increase yield (output per hectare) and increase productivity of farmers= higher incomes
e.g. Zimbabwe had farm land seized by foreign farmers= led to high poverty, now taken back legal land rights
- means Govs can make land-based taxes= easier to title who owns specific parts of land= generate tax revenue for healthcare and education to improve social infrastructure
- secure rights protect environment= retuned Amazon rainforest to local tribes= protect against deforestation= indigenous population don't want to cut down trees= more sustainable growth
- can be used to drive gender empowerment= women in Africa lack right to own a house= this way it would mean property more equitably distributed for women= less barriers to SOL
33
define tragedy of the commons
- concept used to illustrate potential conflict between individual self interests of producers and consumers and the common public good
34
define common pool resource
characteristics of rivalry in consumption and no excludability
e.g. grazing land or fish stocks= over exploitation of common resources can lead to tragedy of commons
35
how does lack of property rights lead to market failure
- Without property rights, resources can be overused or misused (e.g. overfishing, pollution) — the "tragedy of the commons"
-
36
how do property rights decrease market failure
- assigning property rights internalises the externality
= if a lake is privately owned, the owner can charge for access or limit use, encouraging sustainable usage
= shifts the MPC (Marginal Private Cost) closer to MSC (Marginal Social Cost), reducing overconsumption and correcting the market failure
-
37
evaluation of property rights
- Works well when enforcement is possible (e.g. land, fisheries, patents).
- Harder with non-excludable goods (e.g. air, oceans).
- Initial distribution of rights may be unfair or politically controversial (e.g. who gets the rights?).
- Monitoring and enforcement costs can be high.
- May lead to inequality or monopolistic behaviour if not regulated.
38
how does free rider problem lead to market failure
- individuals can benefit from a public good without paying for it
= leads to the free rider problem where individuals have an incentive to avoid paying, expecting others to cover the cost
= private firms can't make a profit from producing public goods, since they can't charge consumers directly or exclude non-payers
= discourages private provision, leading to underproduction or complete absence of the good in a free market
- causes market for public goods to be incomplete or missing as there's no effective way to enforce payment or gain profit, these goods are not produced, even if they are valued by society
= allocative inefficiency, where resources are not being used to produce goods that society desires
- underproduction of merit goods that generate positive externalities, where 3rd parties benefit from consumption wo being directly involved in the transaction
= street lighting increases safety for all pedestrians and drivers
