1.3 - Market Failure Flashcards
What is market failure
when the market fails to allocate resources efficiently, causing a loss in social welfare loss
What’s an externality
A cost/benefit a third party receives from the production or consumption of a good or service
What’s is non-rival
Where the consumption of one individual doesn’t reduce the availability to others (e.g spotify subscription)
What is non-excludable
The good isn’t just for those who have paid for it (you have free access to it).
What a rival good
There’s a limited amount
What’s an excludable good
A product/service you pay for
What’s a public good
Non-rival and non-excludable goods
What’s an information gap
Where the producer/consumer doesn’t have complete knowledge of the good
What’s are private costs/benefits
the costs/benefits to the individual participating in the transaction of the good
What are social costs/benefits
the costs/benefits to society as a whole
What are external costs/benefits
the costs/benefits to a third party not involved in the economic activity (the difference between private costs/benefits and social costs/benefits)
What’s a merit good
A good with external benefits, where the benefit to society is greater than the benefit to the individual
What’s a demerit good
A good with external costs, where the cost to society is greater than the cost to the individual
What’s a marginal cost/benefit
the extra cost/benefit of producing or consuming one extra unit of the good
What’s marginal private benefit (MPB)
The extra satisfaction gained by the individual from consuming one more of a good
What’s marginal social benefit (MSB)
The extra gain to society from the consumption of one more good
What’s marginal private cost (MPC)
The extra cost to the individual from producing one more of the good
What’s marginal social cost (MSC)
The extra cost to society from the production of one more good
When do negative externalities of production occur
When social costs are greater than private costs
When do positive externalities of consumption occur
When social benefits are greater than social costs
What’s government intervention
Where the government intervenes to ensure the market considers the external costs and benefits
What are indirect taxes and subsidies
Where taxes are put on goods with negative externalities and subsidies on goods with positive externalities
What are tradable pollution permits
Allow firms to produce up to a certain amount of pollution, and can be traded amongst firms
What is provision of the good
When social benefits are very high, the government may decide to provide the good through taxation (e.g. healthcare and education)
What’s provision of information
Since some externalities are associated with information gaps, the government can provide information to help people make informed decisions and acknowledge external costs
What are regulations
This limits consumption of goods with negative externalities
What’s a free rider
Someone who receives the benefit from a public good without paying for it
Where do public goods come from
The are provided by the government and financed through taxation
What’s symmetric information
Where buyers and sellers have access to the same information
What’s asymmetric information
Where one party knows more than the other in an economic transaction
How do information gaps lead to market failure
As there is a misallocation of resources because people do not buy things that maximise their welfare
