Other market failures Flashcards
(20 cards)
What are the main sources of market failure besides externalities?
Public goods, common resources, asymmetric information, and concentrated market power.
What is rivalry in economics?
A good is rival if one person’s consumption reduces the amount available for others.
What is excludability in economics?
A good is excludable if people can be prevented from using it unless they pay.
What is a public good?
A good that is non-rival and non-excludable, leading to the free-rider problem.
What is the free-rider problem?
When people consume a good without paying, leading to underproduction.
What is a common resource?
A good that is rival but non-excludable, prone to overuse (tragedy of the commons).
What is the tragedy of the commons?
Overuse of a common resource due to lack of individual incentives to conserve it.
How can property rights address the tragedy of the commons?
Assigning ownership creates incentives for sustainable use.
What is asymmetric information?
When one party in a transaction has more or better information than the other.
What is adverse selection?
Occurs before a transaction when one party withholds negative information, leading to poor market outcomes.
What is a real-world example of adverse selection?
Used car sales or health insurance with hidden health risks.
What is moral hazard?
Occurs after a transaction when one party changes behavior in a way that harms the other.
What are examples of moral hazard?
Risky driving after car insurance or neglecting health after buying health insurance.
What is concentrated market power?
When few firms dominate a market, setting prices above marginal cost and reducing output.
What are the consequences of concentrated market power?
Higher prices, lower output, and loss of allocative efficiency.
What are the four market structures?
Perfect competition, monopolistic competition, oligopoly, and monopoly.
What distinguishes market structures?
Degree of competition and firms’ market power.
What are examples of barriers to market entry?
Patents, resource control, network effects, economies of scale, and brand loyalty.
How do monopolies set prices?
They set prices above marginal cost because they face no competition.
Why is full competition efficient?
Because price equals marginal cost, ensuring allocative efficiency.
