Market Failure Flashcards
(11 cards)
What are negative externalities?
Negative externalities are costs which affect 3rd parties outside the price mechanism.
Draw a costs/benefits diagram showing negative production externalities.
After the socially efficient equilibrium there is a welfare loss.
Only MSC moves up (EC + PC)
S = MPC
D = MPB = MSB
What is the issue in negative externalities?
Firms/consumers only consider private benefits which lead to over consumption/production so resources are misallocated.
What are positive externalities?
Positive externalities are benefits which affect 3rd parties outside the price mechanism.
Draw a cost/benefit diagram showing positive consumption externalities.
Before the socially efficient equilibrium there is a potential welfare gain.
Only MSB moves up (PB+EB)
S = MSC = MPC
D = MPB
What is the issues with positive externalities?
Issues are firms/consumers only consider private benefits so they under consume/produce so resources are misallocated.
What are public goods?
Public goods are non-excludable (can’t stop someone else using it) and non-rival (using it doesn’t diminish it’s quantity) .
What can public goods lead to?
The free rider problem where consumers wait for someone else to buy the good so they can use it for free. Producers have no incentive to provide it (no profit) so there is a missing market.
What are information gaps and asymmetric information?
Information gaps happen when consumers/producers lack information to make informed decisions.
Asymmetric information is when one party knows more than the other party in a transaction.
What is imperfect information?
Imperfect information is when someone doesn’t have full information about the costs/benefits of their decision.
What can imperfect information cause?
Underconsumption - consumers underconsume merit goods as they don’t know the possible benefits of their decision.
Overconsumption - consumers over consume de-merit goods as they don’t know the possible costs of their decision.
