Flashcards in Market Failure Deck (48):
What is the price mechanism?
A price mechanism is the manner in which the prices of goods or services affect the supply and demand of goods and services
What is allocation?
Allocating scarce resources among competing uses
What is rationing?
When there is a shortage in a product prices will rise to deter some consumers from purchasing it.
What is signalling?
Changes in price provide information to both consumers and suppliers about changes in market conditions.
What are incentives?
An example of an incentive would be as the price of a product rises, quantity supplied increases as businesses respond.
What are 6 types of market failure?
What is market failure?
This occurs when there is an inefficient allocation of resources in a free market.
What is complete market failure?
When the market does not supply products at all- there is a missing market.
What is an example of complete market failure?
Pure public goods, missing market in the provision of public goods
What is Partial market failure?
When the market functions but it suppliers either the wrong quantity of a product or at the wrong price
What is an example of partial market failure?
Negative externalities in production
What are externalities?
Externalities are spill-over affects from production and or consumption for which no appropriate compensation is paid to one or more third parties affected.
What is the marginal private cost?
MPC is the change to the producers total cost, brought on by the firm producing an additional unit of output.
What is Marginal external cost
Cost to third parties from the production of an additional unit of output.
What is marginal social cost?
The total cost to society of producing an extra unit of output. MSC=MPC+MEC
What is a private cost?
The cost faced by the producer or consumer directly involved in a transaction
What is a social cost?
Private cost+ External cost
If social cost exceeds private cost what occurs?
What are social costs?
These occur when the activity of one agent has a negative effect on the well being of a third party. The consumer and producer don't have to pay this cost meaning that output will be too high and market price will be too low in the producers case.
What is marginal private benefit?
Benefit to consumer or business of consuming/selling an additional unit of output.
What is Marginal external benefit?
Benefit to third parties from the consumption of an extra unit of output.
What is marginal social benefit?
Total benefit to society from consuming an extra unit, MSB=MPB+MEB
What are private benefits?
Private benefits are the benefits for producer or consumer directly involved in an economic transaction.
How can positive externalities in consumption lead to market failure?
Positive externalities in consumption can cause market failure as if the benefit to society exceeds the marginal private benefit then the market equilibrium quantity for university education is likely to be lower than the social optimum equilibrium quantity.
What are negative externalities in production?
Air pollution from factories
Pollution from fertilizers
Collapsing fish stocks
What are negative externalities from consumption?
Noise pollution from neighbors
Air pollution from smokers
Addiction on families
Litter from tourists
Spill over costs from rising obesity
Draw a diagram showing negative externalities in production and where the welfare loss is.
Draw a diagram showing positive externalities in consumption, showing the social welfare gain.
What are examples of positive externalities in production?
Positive spillover effects from research and development
Open source software made freely available to users
What is social optimum on a MSC graph?
What are public goods?
Public goods are non-rival and non-excludable usually provided by the state
What does non-rival mean in terms of public goods?
Consumption by one person does not reduce the supply available for others
What does non-excludability mean in terms of public goods?
The benefits derived from them cannot be confined solely to those who have paid for it. Non-payers can enjoy the benefits of consumption at no financial cost to themselves
Give examples of public goods?
Public service broadcasting
What are private goods?
Private goods are excludable and rival in consumption.
What are examples of private goods?
Exclusive golf clubs
Tickets for a sporting event
What is the free rider problem?
Because public goods are non-excludable it is difficult to charge people for benefiting once a product is available.
Free riders have no incentive to reveal how much they are willing and able to pay for a public good.
What does the free rider problem cause?
Leads to under-provision of a good and thus causes market failure.
Why are pure public goods not usually provided by the private sector?
As they would be unable to supply them for a profit.
What are merit goods?
Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.
Why are merit goods under-provided?
People will only consider their own private costs and benefits, leading to a reduced output.
What are de-merit goods?
A product which generates negative externalities in consumption. Where the social optimum level of consumption is less than the private level of consumption.
How can monopoly power lead to market failure?
The monopolist will seek to extract a price from consumers above the cost of resources used in making the product. Higher prices mean that consumers' needs and wants are not being satisfied as the product is being under-consumed. These higher prices cause a loss of consumer surplus and welfare and will disproportionately affect lower income families
What are the possible advantages of having a monopoly supplier?
Economics of scale-Monopoly producers may achieve this and lower the average cost
International competition may make producers face overseas competition ensuring that they can't enforce a price increase.
Research and development increase as the profits made may lead to new innovation with important spillover benefits. This can lead to gains in dynamic efficiency.
What are four types of government intervention?
Taxes and Subsidies
Maximum and Minimum prices
Regulating the market
State owned/State funding and provision
What is government intervention?
Government intervention is when the state gets involved in markets and takes action to try correct market failure, improve efficiency, change the the distribution of income and wealth.
What are examples of indirect taxes?
Plastic bag charge