1.3 Flashcards
What is market failure
when the market fails to allocate scarce resources efficiently, causing a loss in social welfare loss.
What are the types of market failures
Externalities - third party effects arising from production and consumption of goods and services
Under provision of public goods - use of a food does not stop others from using it, whilst its consumption does not reduce the amount available for consumption by others
Information gap-where consumers or producers do not have symmetric information
What are private, social and external costs/benefits
Private- costs/benefit to business or individuals
Social- cost/benefit to society
External costs-costs/benefit to third party not involved in economic activity
What is a merit and demerit good
Merit- good with external benefits - benefit to society is greater than benefit to individual
Demerit- cost to society is greater than the cost to the individual
What are the different ways the government can intervene
Indirect taxes and subsidies
Tradable pollution permits
Provision of goods
Provision of information
Regulation
What are public goods
Missing from free market
Non rivalry-one persons use of the good does not stop others from using it
Non excludable- you cannot stop someone from accessing it and someone cannot choose not to access it
What is the free rider problem
Someone who benefits a good or service without paying for it
Therefore private sectors will not provide public goods because they cannot be sure of making a profit.
Informations gaps
Advertising leads to information gap. Increasing technology decreases information gaps
Lead to market failure as there is a misallocation of resources
