Market Failure Flashcards
(20 cards)
What is Market Failure?
Market failure occurs when the market system is unable to allocate resources efficiently
What are all the examples of market failure?
- Monopolies,
- Merit/demerit goods,
- Positive/negative externalities,
- Public goods,
What is a Demerit Good?
Demerit goods are those over provided by the market creating externalities that are deemed to be bad for society.
What is a Merit Good?
Merit goods are underprovided by the market, greater consumption would benefit individuals and society as a whole.
What is a monopoly?
Monopolies are when one firm is the only one in the market that is offering to sell a good/service and can therefore raise the price as high as they want as the consumer has no alternatives.
What is a externality?
externalities are the costs/benefits to a third party created by a business undertaking economic activity.
What is a positive externality?
Positive externalities are the benefits to a third party (society) that are not included in the price of an activity.
What is a negative externality?
Negative externalities are the costs to a third party (society) that are not included in the price of an activity.
Social costs equation?
Private costs (to you) + External costs (to others) = social costs (to everyone)
Social benefits equation?
Private benefits (to you) + External benefits (to others) = Social benefits (to everyone)
What is Government Intervention?
Government Intervention is when the government try to solve market failure. They do this through Indirect tax, subsidies, max price, min price, and direct provision.
What is Indirect Tax?
A Tax to demerit goods in order to raise their prices and reduce their consumption.
What are Subsidies?
The government pays businesses in order to have them produce more merit goods and to lower the prices of merit goods.
What is Maximum Price?
A government says that firms can only sell this good/service no higher than this price.
This limits how expensive Businesses can make merit goods and will increase their consumption.
What is Minimum Price?
A Government says that firms can only sell this good/service no lower than this price.
This limits how cheap demerit goods can become and will decrease their consumption by making them more expensive.
What is Direct Provision?
Direct provision is when the government supplies society with a good/service for free so we don’t need to pay for it.
For example; streetlights.
What are Positive Externalities of consumption?
these are goods/services that have good effects if we buy them.
For example; education, vaccinations.
What are Negative externalities of consumption?
These are goods/services that have bad effects if we buy them.
For example; smoking, Alcohol.
What are positive externalities of production?
These are goods/services that have good effects if we produce them.
For example; houses, hospitals, schools.
What are negative externalities of production?
These are goods/services that have bad effects if we produce them.
For example; pollution, vapes.
