1.3 Market failure Flashcards
Externalities
Third party effects arising from prod and cons of G/S for which no appropriate compensation is paid
Info gap
When either buyer or seller does not have access to info needed to make a fully informed decision
Non-excludability
benefits derived from pure public goods cannot be confined solely to those who have paid for it, Non-payers can enjoy the benefits of consumption at no financial cost
no cost efficient way to price
Non-rivalry
Consumption by one consumer does not restrict consumption by other consumers
Free rider problem
difficult to charge people for benefitting once a product is available, under-provision of a good and thus causes market failure, no incentive to reveal how much they are willing and able to pay for a public good because they can enjoy benefit without paying
Property rights
Legal control/ownership
Key requirement for market system; must be possible to claim the right to own.
If asset is un-owned, no one has an incentive to protect it from abuse.
hard to efficiently distribute
costly enforcement
hard to decide who gets the rights
Private costs
Faced by producer or consumer directly involved in transaction
Examples of negative externalities from production
Air pollution from factories
Pollution from fertilisers
Industrial waste
Noise pollution
Methane emissions
Examples of negative externalities from consumption
Particulates from vehicle pollution
Household waste
Noise pollution from neighbours
Air pollution from smokers
Traffic congestion
Impact of addiction on families
Litter from tourists
Features of pure public goods
Non-excludable: Non-payers can benefit from consumption with no financial cost.
Non-rival consumption: consumption by one student does not restrict consumption by others.
Quasi-public good
Semi-non-rival: more consumers using park or road does not reduce space available. But beaches can become crowded.
Semi
Arguments for and against state provision of public goods
Helps prevent under provision or consumption if public goods so social welfare is improved. Helps affordability and access to important services for lower income households can reduce income inequality.
However, if government is monopoly provider, risk of lack of efficiency from a lack of competition.
Causes of info failure
Misunderstanding of true costs/benefits (tanning salons)
Uncertainty about costs and benefits (young people buying into pension schemes when we can only guess financial condition in 40 years time)
Complex info (specialist products)
Inaccurate/misleading info: persuasive advertising may oversell a product.
Addiction
Lack of awareness (system of uni finance complicated for some people to understand)
Habitual purchase
Moral hazard
Insured consumers likely to take greater risks knowing that a claim will be paid for their cover. Consumer knows more about their intended actions than insurer.
Regulation
rule enacted by gov that must be followed by econ agents to encourage change in behaviour
admin costs of enforcement
appropriate punishment needed
setting right regulation - if too lax, no incentive to follow
black markets and unintended consequences
equity
