Types Of Market Failure Flashcards
(17 cards)
What is market failure?
Market failure occurs when the free market fails to allocate scarce resources at the socially optimum level.
What are the main causes of market failure?
Negative externalities
Positive externalities
De-merit goods
Merit goods
Public goods
Common access resources
Imperfect information
What is a negative externality?
A negative externality is a harmful effect on third parties not involved in the economic transaction (e.g., pollution).
Why do negative externalities cause market failure?
Because producers or consumers ignore the external costs, leading to overproduction or overconsumption.
What is a positive externality?
A positive externality is a beneficial effect on third parties (e.g., vaccinations).
Why do positive externalities cause market failure?
Because the full social benefit isn’t considered, leading to underproduction or underconsumption.
What are de-merit goods?
Goods that are worse for consumers than they realise (e.g., cigarettes).
What are merit goods?
Goods that are better for consumers than they realise (e.g., education, healthcare).
How do merit and de-merit goods cause market failure?
Due to imperfect information, consumers misjudge the value or harm of goods, leading to poor decisions and misallocation of resources.
What is the free rider problem (in public goods)?
When individuals benefit from a good without paying for it, leading to underprovision by the market.
What are common access resources?
Resources that are available to all (like oceans or forests) and often overused due to self-interest – known as the “tragedy of the commons.”
What is the difference between income inequality and inequity?
Income inequality refers to the unequal distribution of income, while inequity refers to unfairness — a normative concept based on personal judgment.
Why is income inequality considered a form of market failure?
It can lead to reduced social mobility, poverty, and inefficiencies in resource allocation, particularly if the inequality is extreme or seen as unfair.
How does monopoly power cause market failure?
Firms with monopoly power can restrict output and raise prices above the socially optimum level, reducing consumer surplus and causing allocative inefficiency.
What is factor immobility?
When factors of production (especially labour) cannot easily move to where they are needed, leading to unemployment and misallocation of resources.
Give an example of geographical labour immobility.
A worker in a rural area may be unable to move to a city for work due to high housing costs or family ties.
What is structural unemployment?
Unemployment caused by a mismatch between workers’ skills and the skills demanded in the labour market, often due to technological change or declining industries.
