Market failures Flashcards
(82 cards)
Define consumer surplus formula
Maximum price consumer is willing to pay - the actual price
- represents the added benefit (because not having to pay much or if consumer surplus is low, they have to pay a lot :( )
Define producer surplus’ formula
Total revenue - total cost = producer surplus
- additional benefits (money)
When does market failure occur?
when the price mechanisms not optimum — basically when it fails to create a market equilibrium
Why is getting the optimum social surplus impossible?
Everyone has their different economics goals and no matter what, someone would be at a disadvantage
-> negative externalities
Why are negative externalities not regarded by producers or consumers
Cannot be aligned with economic goal
- negative externalities not quantifiable by profit
Outline the resukts of inefficient allocation of resources
- under-provision of certain goods and services [producers] (e.g. from taxes)
- over-provision of certain goods (e.g. from subsidies, price floors)
- under and over consumption of goods
Outline some examples of market failure
The under-provision of merit goods such as education and healthcare
Why do private schools and private hospitals not lower their prices
To maximize profit
When the gov can’t give the services, who would step up?
The producers
When there’s a shortage of labor, who should step up and how?
The government
- can incentivize
- making migration more difficult etc
Define private costs
costs incurred by the consumption or production of goods and services (main economic agents — producers and consumers)
Define externalities
External costs costs or benefits of an economic transaction (selling, buying) that causes the market to fail to achieve the social optimum level of production or consumption
(e.g. fertilizers, air pollution, second-hand smokers etc.)
Define social optimum level of production or consumption
MSC = MSB
Differentiate external benefits and external costs
External costs AKA negative externalities - adverse impacts to third parties (ie. society)
Internal costs AKA positive externalities - positive impacts to third parties
Define private benefits
Advantages enjoyed by an indv or company and/or consumers
Define private costs
actual expenses from buying or producing something
Define social benefits
social benefits = private benefits + positive externalities
-> benefits to the whole society
-> 3rd party (w/o econ agents): pos ext.;
-> economic agents: private ben.;
Define social costs
social costs = private costs + negative externalities
-> costs incurred by the whole society (3rd parties + consuemrs and producers)
Define marginal private benefits (MPB)
additional value enjoyed by households and firms
- after production or consumption of additional unit of output
Define marginal social benefits (MSB)
total gains enjoyed by households and firms and everyone else
- after production or consumption of additional unit of output
Marginal private cost and margincal social cost (CONT)
Describe the social surplus/community surplus
X is allocative efficient (equilibrium price = quantity)
Why can positive externalities can cause market failure?
When MSC < MSB (??):
-market tends to produce less of a good or service with external benefits than is socially optimal;
- due to individuals do not consider the benefits to society
How can merit goods cause market failure
Since merit goods are both rivalrous and excludable,
- merit goods tend to be under-consumed and underproduced due to the irrational nature and imperfect info (they don’t know what is good and bad for them)
