1.3 Flashcards
When does market failure occur?
Market failure occurs when the market is unable to efficiently allocate scarce resources to meet the needs of society.
In practise, there will always be market failure - allocative inefficiency
Who’s role is it to eliminate market failure?
The government through government intervention.
What causes the misallocation of resources?
- under-provision of public goods
- information gaps
- externalities
Complete market failure
Occurs when there is no market - missing market. Goods/ services not produced as the revenue received is not enough
Partial market failure
Occurs when a market exists but there is a misallocation of resources - goods and services are supplied in the wrong amounts
Externalities
The costs and benefits to a third party created by economic agents when undertaking their activities.
Negative externalities
Costs to a third party that are not included in the price of the economic activity.
social costs > private costs
Positive externalities
benefits to a third party not included in the price of the economic activity.
Private costs
costs by an individual or firm directly involved in the transactions
Social costs
Costs of consuming or producing goods and services that are paid for by society (include private costs)
Private benefits
benefits of consuming or producing goods/services that are are received by the economic unit that payed for it.
Social benefits
Benefits of consuming or producing goods/services received by society
social>private benefits = positive externality
Free rider problem
the difference between social and private benefits that are unpaid for.
Marginal benefit
The benefit to a consumer of consuming one more unit of a good or service
Marginal cost
The cost to a producer of producing one more unit of a good or service.
