Market Failure Flashcards
(45 cards)
Market failure
When a market leads to a misallocation of resources
Complete market failure
When there is a missing market
- This is the case for public goods
Partial market failure
When the market exists but doesn’t provide resources in optimum quantities so theres a misallocation of resources
- there is either over production/comsumption or under production/consumption
Public goods
Non excludable: non paying customers cannot be excluded from benefiting
Non rival: one persons enjoyment does not diminish another persons
Examples of public goods
- street lights
- flood defences
- police
- parks
Private goods
Opposite of public goods, they are excludable and rival.
Non payers an be excluded from consuming a good and the consumption of that good diminishes the enjoyment for others
Quasi public good
Private goods that posses some characteristics of a public good. They may be partially excludable or rival
EG: WiFi, roads
How can public goods lead to market failure
Because the market fails to provide them efficiently due to free rider problem and missing markets which will require govt intervention and lead to inefficiencies
Free rider problem
When customers realise they can access the good without paying for it. So they are ‘free-riding’ on the backs of other customers paying
EG: In the case of flood protection, coastal homeowners would have an incentive to wait for their neighbours to fund the flood protection.
Overtime, customers paying will stop and these goods will become under provided in society resulting in a missing market and complete market failure
How can govt stop the free rider problem
Govt intervention - direct & indirect taxed for tax revenue to provide public goods - this is know as STATE PROVISION
What are ‘the commons’
Natural resources
The tragedy of commons
When in a free market individuals that have access to natural public goods act in self-interest over wellbeing of society
- individuals could exploit shared resources till there’s excess demand resulting in overconsumption or depletion making the commons a rivalrous good
EG: overfishing can deplete the population of fishes
How can govt intervene over the tragedy of the commons
property rigths
Positive externalities
positive effects on third parties outside the price mechanisms (outside transaction)
Positive externalities in production
Actions of forms have wider benefits to society.
The market is failing due to under production of these goods and services as the private costs of the firm are greater than the social costs
Positive externalities in consumption
The actions of individual consumers have a wider benefit to society.
When private benefit
Private costs
the costs of a producer involved in the price mechanisms
Social benefit
The total of private benefit and external benefit
Why is there an under consumption of goods in positive consumption externalities
- The social benefit is greater than the private benefit so consumers consume less than the social optimal level.
- Consumers may be unaware of the full benefits of the consumption leads to lower demand (vaccines,education)
On a positive consumption diagram where is allocative efficiency
At optimal level, where MSB=MSC
On an externalities diagram what is the supply and demand curve equals to
Supply = MC
Demand = MB
Merit good
products that are beneficial to society but not enough provided in free market
Demerit goods
products which have harmful impacts on consumers
Why are merit goods under consumed and under provided
Consumers don’t full know the the private or external benefits and under provided because they are a cause of partial market failure
