Market Failure Term 2 Flashcards
What is Market Failure
Occurs when resources are not allocated efficiently.
There are 4 types:
- Market Power
- Externalities
- Public Goods
- Common goods
when does market power exist
Market power exists when:
- there are a small number of firms.
-Firms use product differentiation.
- There are barriers to entry to restrict competition.
Best example of market power is a monopoly or a oligopoly. Monopoly is a market with just 1 firm, e.g. synergy.
Oligopoly is a market with very few dominant firms, e.g. Quantas.
Barriers to entry:
Barriers to entry are anything that blocks or restricts a business from entering a business. They include:
- Controlling of scarce resources.
- Technological advantage.
- Government licensing resulting in legal monopoly.
- Patent on an invention protecting them from competition.
Business Practices that reduce competition:
- Cartel: When businesses agree to collude.
- Collusion: An agreement between firms.
- Market sharing.
What happens when market power exists
When market power exists, the firms with this power have a higher incentive to collude, leading to reduced competition, higher prices, and lower output.
Government Policies to reduce market power:
These policies aim to increase competition and reduce the prices of goods and services to benefit consumers. Examples include the competition and consumer act of 2010.
Government Regulations to reduce market power:
Price Regulations: A type of price control which prevent businesses from exploiting consumers.
When prices are regulated, the markets become more competitive, increasing quantity and economic welfare
what are negative externalities
When the production or consumption of a good or service creates an external cost, negative externalities are created.
What are positive externalities
Positive externalities create external benefits for third parties.
How does the government intervene on negative externalities
The governemtn intervenes on negative externalities by implementing a tax. On this tax, the producers or the creators of the negative externality have to pay the price of the externality. This will make the price to increase to Pe, and Quantity to increase to Qe.
How does the government intervene on positive externalities
The government intervenes on positive externalities by implementing a subsidy. The government pay a grant to consumers, which cause the quantity to increase to Qe, and the price to increase to Pe, leading to maximised efficiency and total surplus.
What are Private Goods
Private goods can be described as the products purchase by a household. They are characterised by being Rival and Excludable, e.g. a household purchasing a car. (This means that the supply available to other consumers are decreased, and non payers cannot consume the product.
What are Club Goods
Clubs goods are characterised by being non-rival, but excludable. For example, itunes or the cinemas. They are excludable as they have a price that consumers must pay, meaning that non-payers cannot consume it. However, they are non-rival as its consumption does not limit the supply available to other consumers.
What are Common Resources
Common resources are characterised by being rival, but non-excludable. Non excludable because they are free, so nonpayers can consume. Rival because the consumption limits the supply available to other consumers. E.g. Fish in the ocean.
What are Public Goods
Publci goods are non-rival and non-excludable. This means that its consumption does not reduce the supply available to others, and that it is free to everyone. E.g. national parks.
