1.3 Flashcards
What does market failure refer to ?
- When the price mechanism leads to an inefficient allocation of resources, away from the market equilibrium price
What is an external cost ?
A cost to a third party that is not involved in the, making, buying/selling and consumption of a specific good or service
What kind of externality is an external cost ?
Negative externality
What is an external benefit ?
A benefit to a third party that is not involved in the, making, buying/selling and consumption of a specific good or service
What kind of externality is an external benefit ?
Positive externality
What are the key features of public goods ?
- Non rivalrous
- Non excludable
What are the key features of private goods ?
- Rivalrous
- Excludable
What does non rivalrous mean ?
Non-rivalrous means that consumption of a product does not prevent another person from also consuming that product
Give an example of a non rivalrous good
A radio programme demonstrates non-rivalry, because if one person listens to the programme it does not prevent another person from also listening to it. However, the radio itself is a rival good.
What does non excludable mean ?
Non-excludable means that once a good is provided, it is impossible to stop people from using it
Give an example of a non excludable good
Once a lighthouse is provided, then ships at sea cannot be prevented from benefiting from it. However, if a car manufacturer provides a new model of car, people can be excluded from purchasing one if they cannot afford one.
What is the free rider problem ?
It is a type of market failure that occurs because everybody is able to benefit from that particular good or service
Why are free riders a problem ?
- Because while not paying for the good, they may continue to use it
- Thus, the good is likely to be under provided or not provided at all
Why are consumers able to free-ride on public goods?
People continue to use them even though they don’t pay for them
Why does the free-rider problem lead to market failure?
No revenue is being generated
What is the equation for social benefits ?
Private benefits + external benefits
What is the equation for social costs ?
Private costs + external costs
When does the social optimum level of output occur ?
The social optimum level of output occurs when all external costs and benefits are accounted for
What will there be if external benefits are present ?
There will be under production / under consumption in a free market
What will there be if external costs are present ?
There will be over production / over consumption in a free market
What is the relationship between the demand curve and marginal utility ?
The law of diminishing marginal utility is one of the reasons that the demand curve is downward sloping
What does demand equal ?
D = MU
What is the supply curve the same as ?
The supply curve is also the same as the marginal cost curve
Why is the supply curve the same as the marginal cost curve ?
- This is because the supply curve shows us the cost of producing an extra unit
- Hence making it the same as the marginal cost curve
What is the marginal cost curve the same as ?
The marginal private cost curve
Define social welfare loss
Economic welfare that is lost due to a misallocation of resources
- Over/under consumption/production
What is social welfare loss a cost to ?
It is a cost to society created by market inefficiency and market disequilibrium
What is larger when there are external benefits, social or private benefits ?
The social benefits will be greater than the private benefits
How can external benefits be shown on a diagram ?
Drawing the marginal social benefit curve to the right of the marginal private benefit curve
What is perfect information ?
When a buyer and/or seller has a complete understanding of the quality and nature of a good or service.
What is imperfect information ?
When a buyer and/or seller lacks a complete understanding of the quality and nature of a good or service.
What is symmetric information ?
When buyers and sellers have equal amounts of knowledge about a good or service.
What is assymetric information ?
When either the buyer or the seller has more information about a good or service than the other party.
What is an information gap ?
When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.
What is marginal social benefit equal to ?
Marginal private benefit + marginal external benefit
Give some examples of positive consumption externalities
- Vaccinations
- Gym memberships
- Healthy food
- Public transport
Give some examples of positive production externalities
- Beekeeping
- Research and development
What is marginal social cost equal to ?
Marginal private cost + Marginal external cost
Give some examples of negative consumption externalities
- Alcohol
- Cigarettes
- Junk food
Give some examples of negative production externalities
- Factories that emit pollutants
- Coal power plants
- Bars and clubs that play loud music
