1.3 Market Failure Flashcards
Define market failure
When the free market leads to a misallocation of resources
Define a public good
A good which possesses the characteristics of non-rivalry and non-excludability
Define non-excludable and non-rival
non-excludable - When the benefits of the consumption of a good cannot be solely confined to those who paid
non-rivalry - The consumption of one good/service by a person does not affect the consumption of others
Define Externalities
A benefit/cost that is enjoyed/suffered by a third party as a result of an economic transaction
Define Information Gaps
When there is a lack of information or asymmetric information in the market
Explain the difference between a public good and a private good
Public good - rival + excludable
Private good - non-rival + non-excludable
What is a quasi-public good
Quasi-Public good - non-rival and excludable or rival and non-excludable
Explain the free rider problem
The burden on a shared resource that is created by its use or overuse by people who aren’t paying their fair share
What 3 costs/benefits come from externalities
Private benefit/cost
External benefit/cost
Social benefit/cost = private + external
Draw a Negative and Positive Production and Consumption externality diagram
POWERPOINT
Explain the difference between symmetric and asymmetric information
symmetric - buyer and seller have the same information
asymmetric - buyer or seller has more information than the other
Define Moral Hazard
When an entity has an incentive to increase its exposure to risk because they do not bear the full cost
Draw on a supply and demand diagram different levels of demand due to perfect and imperfect information for both demerit goods and merit goods
Powerpoint or booket
What type of goods are positive and negative externalities
Positive - Merit goods
Negative - Demerit goods
