MARKET FAILURE Flashcards
Types of market failure…
- Public goods
- Common access resources
- Positive externalities
- Negative externalities
- Asymmetric information
Public goods…
Public goods can be considered a market failure because firms are reluctant to spend or use their resources towards producing goods or services as they won’t receive a profit due t the fact that public goods are non-excludable even if the end user doesn’t pay for them. Pubs gods are also non-rivalrous.
Externalities…
Externalitiesare considered a third source of market failure. They represent extra costs or benefits for third parties (someone not directly involved in the particular transaction) that may arise when goods and services are produced or consumed. There are two types of externalities: negative and positive.
Positive externalities…
Positive externalities occur when a firm produces a good or service that will provide benefit directly or indirectly to a third party not involved in the transaction.
- Positive externalities can occur in production (I.e if a beekeeper sets up near food producers, the bees will pollinate nearby trees and increase the yield).
- They can also occur in consumption (I.e if a person gets a vaccination, the reduce the risk of someone in their proximity being viable for the disease as there is one less carrier)
Negative externalities…
A negative externality occurs when a cost is imposed on a third party not involved in the transaction of a good or service.
- An example of a negative externality in production is when a factory producer releases harmful chemicals in the air polluting our clean air to produce a good, even though we may not use or buy the item.
- A negative externality in consumption is when a person is smoking a cigarette in public, those around them will have little choice but have to inhale the smoke passively.
Asymmetric information…
Asymmetric information is deemed a market failure because it refers to a situation where one party in a market has more or less information than the other. For resources to be allocated efficiently, buyers and sellers need to have complete information before making decisions but when asymmetric information has occurred it means there’s an unequal balance of info.
- Example where seller has more info is when a car is sold. The seller knows exactly what the car went through before it was sold, the buyer won’t.
- When a buyer might have more info is when someone purchases insurance, the broker being the seller. A buyer will usually know more about their probability of them making a claim than the seller.
Common access resources…
Common access resources refers to the goods that are not owned by anyone, usually do not have a market price and are available for anyone to use even if they’ve not paid for them. Common access resources are non-excludable but are rivalrous. Basically with these resources, once they’re used, they’re gone and for that reason is why they can be a market failure, when they are used unsustainably.
- Examples include; fish in the ocean, clean air and forests.
Market failure…
Market failure occurs when a market is unable to allocate resources efficiently enough or when resources are allocated in a way that the satisfaction and well being of the community is not maximised.
Government intervention…
In order to correct a market failure the government may chose to intervene, some examples of this include;
- subsidies
- provision
- regulation
- advertising
- taxation
Government failure…
Is a term used to describe a situation were government intervention fails to correct a market failure and improve the allocation of resources or it might even actually makes the allocation of resources less efficient.
- An example of a government failure was the carbon tax…it was introduced in 2012 but trashed in 2014 because of a few reasons; firstly it came at the wrong time (the govt promised there wouldn’t be a carbon tax which gained them votes so when they introduced it people got angry no opposed), it was too expensive and the governments design of the scheme wasn’t well thought of at all as the carbon tax ended up being counterproductive.
