Market Failure Flashcards
(19 cards)
What is complete market failure?
Where the free market fails to provide a product at all despite demand for it.
What is the definition of a market failure?
Where the market fails to produce what consumers require at the lowest possible cost.
What is a partial market failure?
Where the free market provides a product but with a misallocation of resources.
What characteristics determine a public good?
NON-RIVALRY= good/service which may be consumed by one consumer without preventing simultaneous consumption by others
NON-EXCLUDABILITY= it is impossible to exclude individuals from consumption
What is a free-rider?
Someone who doesn’t contribute to public goods but reaps the benefits e.g fireworks
What is a quasi public good?
A good that has some of the qualities of a public good but not all
What is an externality?
Third party effects arising from production and consumption of goods/services for which no compensation is paid.
What is a negative externality?
When social costs exceed private costs.
What is the difference between wealth and income?
WEALTH= stock owned assets e.g housing property
INCOME= the flow of earnings to a factor of production over a period of time
What is a positive externality?
When social benefits exceed private benefits.
How can inequality lead to a market failure?
- unbalanced income distribution
- poverty
- discrimination
- housing prices
How can imperfect consumer knowledge lead to market failure?
- do not know all the options
- consumers know less than producers
- inaccurate advertising
How can resource immobility lead to a market failure?
- geographical= cannot move to a new location
- occupational= cannot move workers to a new location
- capital= cannot move equipment to a new location
What is social efficiency?
When external costs and benefits are accounted for.
What is technical efficiency?
When the production of goods or services uses the minimum amount of resources.
What is a merit good?
Goods/services the government feel people will under-consume so must subsidy or provide for free e.g healthy food
What is a de-merit good?
Goods/services which would be over consumed in a free market but brings lower overall benefit to consumers than they realise e.g cigarettes
How can monopolies lead to market failure?
As one company is whole market:
- unfair pricing
- rigging of markets
- preventing new firms entering market
What are the 5 solutions to market failure?
T= taxation: internalises the externality, forces polluters to pay ‘true cost’
R= regulation: fines set in for those who break the law so that they must consider their actions
I= info provision: providing consumers with accurate information to guide their decisions
P= permits: reduce pollution as firms must pay for their negative externalities
S= subsidies: money given by the gov to producers to lower costs of production
