1.3 Flashcards
Define Market Failure
When market forces (supply and demand) do not result in the efficient allocation of resources.
Define misallocation of resources
When resources are not allocated to their most efficient use
What are Merit goods?
Goods that when consumed provide a positive impact and positive externalities. e.g Education
What are Demerit goods?
Goods that when consumed provide a negative impact and negative externalities. e.g Cigarettes.
What are private costs?
Direct costs to producers and consumers for producing and consuming a good.
What are the private costs for consumers?
The price paid for the good/service
What are the private costs for produces?
Wages, rent and raw materials
What are external costs?
Costs to third parties who are not involved in the transaction.
What are examples of external costs in production?
Air pollution, Noise pollution, Deforestation.
What are examples of external costs in consumption.
The effects from being next to a smoker.
What are social costs?
The sum of private costs and external costs
What are the reasons a free market may fail?
1- externalities
2- non provision of public goods
3- information gaps
4- moral hazard
5- immobility of labour
6- speculation and market failure
What are private benefits?
Direct benefits to producers and consumers for producing and consuming a product.
What is the private benefit for a producer?
The revenue received from the sale of a product/service.
What is the private benefit for a consumer?
The utility gained by the consumer from the consumption of the product/service
What are external benefits?
Benefits to third parties.
What are examples of external benefits of consumption?
Individuals who decide to have vaccinations preventing the spread of the disease to others.
Households with well kept gardens increasing the market value of neighbouring properties.
What are examples of external benefits of production?
A farmer who keeps bees to make honey. The bees will benefit surrounding farmers by pollinating their crops.
A firm that trains workers in computing skills. Other firms that employ these workers will benefit.
What are private goods?
Goods that are excludable and rivalrous. It can only be used and consumed by one party at a time.
What are public goods?
Good that are non rivalrous and non excludable. For example the park or streetlights.
What does Non-rivalrous mean?
That consumption by one person does not limit consumption by others.
What does Non-excludable mean?
If a good is available for one person, it is available for everyone.
What is the free rider problem?
Once a product is provided it is impossible to prevent people from using it and therefore impossible to charge for it.
How does public goods lead to a misallocation of resources?
Public goods lead to misallocation of resources because their non-excludability and non-rivalry result in the free-rider problem, where people benefit without paying. This discourages private firms from producing them, causing underproduction or a missing market. Government intervention is often needed but can risk inefficiency if mismanaged.
