Market Failure Flashcards
(9 cards)
What is market failure?
When a free market leads to a misallocation of resources
What’s a free market?
A market free from any types of government regulation, e.g. subsidies, market specific taxes, rules and regulations
Why do free markets in theory lead to a perfect allocation of resources?
Functions of price maintain equilibrium so that there is no excess demand or supply, e.g. demand increase will lead to an increase in price so that firms are more willing and able to supply
What is the signalling function of price?
Price illustrates to consumers and suppliers where resources are needed by reflecting scarcities and surpluses
What is the incentivising function of price?
Price gives the reward of profit to firms, thus a high price incentives firms to join the market as they will be rewarded with profit
What is the rationing function of price?
Price shows where there are shortages, a good or service that is not supplied to a sufficient extent will have a high price to reduce its consumption and ration it
What fundamentally causes market failure?
Free markets failing to find equilibrium price that incorporates all costs and benefits
What is a merit good?
A good with positive externalities, tends to be undervalued by society so under consumed/ produced
What is a demerit good?
A good with negative externalities, therefore tend to be over consumed and over produced
