Market failure Flashcards
Consumer surplus
The difference between the amount a consumer is willing to pay for a product compared to actual price
Producer surplus
the difference between the cost of producing a good or service and the price recieved by the producer for the product
Allocative efficiency
socially optimum allocation of resources where socail prodcucer and consumer surplus is maximised(MR-MC)(D=S)
Productive efficiency
producers minimise the wastage of resources(MC=AC)
Market failure
Price mechanism leads to an inefficent allocation of resources and DWL of economic welfare
Deadweight loss
cost to society due to market inefficiency leading to ME being allocative inefficient
Information failure
when people inaccurate or incomplete data and so make potentially wrong/irrational choices
Cuases of info failure
-info gap about benefits e.g education
-complexity e.g banking or E numbers
-asymmetric info- imbalance in information between buyers + sellers
Quasi public goods
-goods that share characteristics of public goods but not all
-normally non-exludable and rivalrous e.g NHS
Arguments for governments providing public goods
-prevents under-provision and underconsumption of goods which improves social welfare
-allows low income households to access goods
- gov providing public goods is good if the good is a natural monopoly
Arguments agains government providing public goods
gov becomes monopoly provider- lack of efficiency and competition in market - lack of innovation
-Huge cost to the government
Negative externalities
when production/consumption of goods impose ecternal sot on 3rd parties outside of the market
Negative externalities Chain
-product has 3rd party negative effect socially
-MPB>MSB or MSC>MPC
-consumer/producers may know this but are selfish and continue consumption/production
-overconsumption/production of good shown by gao between Q and Q1
-ME is at Q,P and not at social optimum equilibrium
-leads to allocative inefficiency+ misallocation of resources + DWL
Positive externalities
production/consumption creates external 3rd party spillover benefits for parties outside the market
Positive externalities Chain
-Good has a positive 3rd party spill over affect
- MPB>MSB or MPC>MSC
-however consumers are selfish and nyopic in nature
-leads to underconsumption/production shown by gap between Q and Q1
-allocative inefficiency, misallocation of resources and DWL
Merit Goods
goods which are often underconsumed in the free market and have positive externalities that are not reflected by the market price
Demrit Good
Good which are usually overconsumed in the free market and have negative externalities that are not reflected in the market price
Information Campaigns
-solves overconsumption of merit goods and underconsumption of demerit goods
Education and awareness campaigns(Info campaigns)
-Gov can raise awareness of benefits or costs of merit and demerit goods e.g adverts
Compulsory Labelling(Info campaigns)
-Gov requires firms to disclose information to reduce asymmetric information e.g smoking kills
Regulation(Info campaigns)
-impose regulations on firms operating in complex markets to provide accurate and complete information to consumers e.g financial market
Ad Valorem
Tax based on the value of an item
e.g propetry tax of 1%
Advantages of Ad valorem
flexible- can be adjusted more easily than specific depending on gov spending requirements
Disadvantages of Ad valorem
-based on the value of the item which can be unpredictable(inflation)-making it harder for businesses to plan and budget for tax liabilities
-administrive complexity
-regressive
