1.3 market failure Flashcards
what is market failure?
refers to the failure of the market system to allocate resources efficiently.
why does market failure arise?
the price mechanism has not taken into account all the costs and/or benefits in the production or consumption of the product or service
why my market failure occur?
externalities, non-provision of public goods, information gaps, monopoly, moral hazard, immobility of labour, speculation and market bubbles
why my market failure occur?
-for resources t be allocated efficiently, necessary for social marginal costs to be equal to equal to social marginal benefits
- some costs or benefits may not be included because they may not be known or may be difficult to quantify
what does social marginal costs refer to?
the addition to total cost of producing a extra unit of output
what does social marginal benefit refer to?
the addition of total benefits of consuming an extra unit
what is the definition of public goods?
good which possesses the characteristics of non-rivalry and non-excludability
what are some examples of public goods?
street lighting, lighthouses, roads
what is a positive externality?
benefit that is enjoyed by a third-party as a result of an economic transaction
what are examples of positive externalities?
schools, hospitals or flu jabs
what is a negative externality?
cost that is suffered by a third party as a result of an economic transaction
what is an example of a negative externality?
alcohol, drugs, cigarettes or coal-fired power stations
what is the definition of an information gap?
when there is a lack of information or asymmetric information in a market
what are examples of information gaps?
pensions, housing, financial services
what is the meaning of externalities?
costs or benefits to third parties who are not directly part of a transaction between producers or consumers
why is an externality a form of market failure?
market forces will not result in an efficient allocation of resources
what is a private cost?
costs paid directly by the producer and consumer in a transaction
what is a social cost?
sum or private costs and external costs
what does non-rival mean?
consumption of one good or service by one person does not does not restrict consumption of other people
what does non-excludability mean?
benefits from a good or service cannot be confined solely to people who paid for it
why is advertising an information gap?
some advertising is informative, some is persuasive
what is the free-rider problem?
characteristics of a public good, when it is provided by someone, other people will benefit from it without paying
why is the free-rider problem a problem?
such circumstances, the market will fail, insufficient number of people will be willing to pay for the product, not be profitable for the business to provide it
what is symmetric information?
both parties in a transaction will have the same information
what is asymmetric information?
where one party of a transaction has more or superior information compared to another
what are some examples of asymmetric information?
housing markets, life insurance, second-hand car sales, financial services, high-tech products
what is a quasi public good?
some elements of a public good, could either have one characteristics, or elements of each characteristics
why might public goods not be provided by the public sector?
non-excludability means that it is impossible to charge for using products, means it has to be provided for by the government
