1.3 Flashcards
market failure definition
when free market fails to allocate resources efficiently
externalities definition
third party costs & benefits not considered by the free market
can be producer/ consumer and +ve/ -ve
public good definition
non-rivalrous (consumption wont affect others, MC=0) and non-excludable (everyone gets it) and suffer from free riders
asymmetric information definition
lack of or uneven information to consumer or producer so irrational decision
free-rider problem
those who benefit do not pay, public good becomes under-provided
tragedy of commons
shared resources and self-interest leads to total loss
private g&s
excludable (P<0) and rivalrous (MC>0)
common g&s and example
non-excludable (P=0) and rivalrous (MC>0)
e.g. NHS, education
club g&s and example
excludable (P<0) and non-rivalrous (MC=0)
e.g. online memberships, toll roads (when not busy)
pure public g&s and example
non-excludable (P=0) and non-rivalrous (MC=0)
e.g. defence, web, protected areas, streetlights
public good graph
demand but no supply so E at O
gov. intervenes, new vertical (finite) supply so E1, DWL to CS
public good graph evaluation
in reality gov has info gap so vertical supply to left (under-provision, lack of money, still some DWL) or right (over-provision, O.C/ waste)
externalities definition
economic transaction which affects a third party, can be produced/ consumer side and +ve/ -ve
consumer externalities
shifts demand, MSB = MPB + externality
e.g. education, cigarettes
producer externalities
shifts supply, MSC = MPC + externality
e.g. beekeeping, manufacturing
DWL in externalites
-ve = social welfare loss
+ve = benefit not gained
externalities evaluation
A.E. at S.E.
hard to measure accurately
underlying cause?
gov. should subsidise
information gap definition
when there is not enough information to make a rational decision
asymmetric information definition
when one party knows more than the other
lemon principle
asymmetric info and adverse selection results in market failure as people are unwilling to sell for the mean price (diff. quality)
overconsumption info gap graph
D>MPB, irrational
pq2-pq1 = DWL (L)
gap as people dont know how bad
underconsumption info gap graph
D<MPB, irrational
pq1-pq2 = DWL (L)
gap as people dont know how good
info failure solutions
mainly regulations, records and checks (ensure quality), credit score,
