1.3 Market Failure Flashcards
What is market failure
An inefficient allocation of resources in the free market, goods are either over-produced/consumed or they are under-produced/consumed
What are the 3 types of market failure
externalities
under-provision of public goods
information gaps
Positive Externalities (external benefits)
The benefits to third parties gained from the production and consumption decisions of others
Negative externalities (external costs)
The costs imposed on the third parties, from the production and consumption decisions of others. If SC>PR
Private benefits (internal benefits)
Benefits received by those who consume and produce products
Private costs (internal costs)
Costs incurred by those who consume and produce products
Social benefits
The total benefits to society
MPB+EMC
Social costs
The total cost to society
MPC+EMC
Hinkley Point (C) Case Study
French and Chinese financed nuclear power station in Somerset.
Will deliver 7% of our electricity
Low carbon electricity & provide economic stimulus
Provide 25,000 construction jobs
5600 work on site during peak
Finished power plant employs 900
Negatives:
230,000 tonnes of steel needed
5.6 cubic metres of earth to move
4000km of electrical cabling
Upfront cost of £!8bn
…… make poster
Neg ext explanation [5]
In the free market, negative externalities would not be reflected in the price of the good/service. This is because the price would be too cheap and too much would be produced and consumed - leading to market failure. If producers took the negative externalitites of production into account when manufacturing the good, they would supply at a higher price and at a lower quantity (the SOL) - this would eliminate the DWL and the externality would be internalised.
Define Public Goods
Non-rivalrous and non-excludable in it’s consumption
Information Gaps
IG lead to market failure as there is a misallocation of resources
because people do not buy things that maximise their welfare. Economic
agents are unable to make rational decisions due to the information gap.
Info Asymetry
When one party has more information/knowledge than the other (doctors>patients, patients are forced to believe their doctors)
Are public goods over-produced, or under-produced
They’re under-produced as they wouldn’t be provided at all in the Free Market. The govt often provides public goods or subsidises private firms.
Explain the ‘free rider’ problem
consumers know that they can still receive the benefits without paying for them, so they don’t pay for them (i.e. street lamps example)
