1.3 - Market Failure Flashcards
what are externalities?
The cost or benefit a third party recieves from an economics transaction outside the market mechanism
(essentially spillover effect of the consumtion of good/service)
what are information gaps?
Economic agents are not able to always make rational decisions due to missing knowledge
(e.g., firms not having info on cost and revenue curves)
what are private costs/ benefits?
Costs/ benefits to the individual consuming the good/service.
what are social cost/benefits?
costs/ benefits of consuming the good to the whole society
what are external costs/ benefits?
costs/ benefits to third party not involved in the economic activity at all
what are the 5 ways the government can invtervene (to make sure the market consideres external costs and benefits)?
- Indirect taxes and subsidies
- Tradeable pollution permits
- Provisions of the good
- Provisions of information
- Regulation
what are the two characteristics of public goods?
- Non-rivalrous: one person using it doesn’t stop others from using it
- Non-excludable: Can’t stop someone using good; someone can’t choose not to use the good (streetlamps)
what is the free-rider?
Someone who recieves the benefits of goods without paying for it
what is the free-rider problem?
You can’t charge an individual a price for the provision of a non-excludable good.
(i.e., cant charge someone to pay for streetlamps cuz someone else will benefit without even paying, therefore government has to provide)
what is symmetric infomation?
when buyers and sellers have potential access to the same information
what is asymmetric information?
when one party has superior knowledge compares to another
How do information gaps lead to market failure?
There is a misallocation of resources
- As people do not buy things that maximise their welfare
