1.3 Flashcards
Market Failure
when the market fails to allocate scarce resources at the social optimum level of output
Types of market failure
Externalities - the cost/benefit to 3rd parties not involved in the original transaction
Under provision of goods - Public goods are non excludable and nonrival so they are under provided because of the free rider problem
Information gaps - Imperfect information leads to misallocation of resources
Private costs
Costs to a party involved in the original transaction (rent, cost of labour, raw materials)
Social costs
Cost to society as a whole Private cost + External cost
Private benefit
Consumers gain a private benefit (satisfaction) from consuming
Producers gain a private benefit (revenue) from selling
Social benefit
Benefit to society Private benefit + External benefit
Social optimum position
MSB=MPB maximum point of welfare
Government policies for negative externalities
Indirect taxes - reduces amount of demerit goods consumed
Subsidies - government encourages consumption of a product
Regulation - enforces less consumption of a good
Public goods
goods missing from free market but provide benefits to society non excludable and nonrival
Non excludable
one person consuming the good doesn’t stop someone else from consuming the good
Nonrival
one person benefiting from the good won’t diminish the good for another person to benefit from the good
Free rider problem
those benefiting from public goods don’t pay for them
Underprovision of public goods
its hard to measure the value consumers gain from public goods, so governments have to estimate the social benefit of the good before providing them
Private goods
rival and excludable only one person can benefit from the good
Quasi public goods
semi excludable and semi non rival and partially provided by the free market - consumers benefit from the road unless its rush hour or has tolls
