1.3 - Market failure Flashcards
What is the definition of market failure?
Where the market system fails to allocate resources efficiently.
Why does market failure occur?
Because the price mechanism has not taken into the benefits/costs of the production or consumption of a good or service.
What are the 3 market failures covered in this topic?
Externalities.
Non-provision of public goods.
Information gaps.
What are externalities?
Costs and benefits to third parties who are not directly part of the transaction between producers and consumers.
What are the 2 types of externalities?
Positive externalities - have a positive impact on third parties. (underproduced)
Negative externalities - have a negative impact on third parties. (overproduced)
What are private costs?
The direct cost to the producer and consumer in the transaction.
Give an example of a private cost to producers and consumers.
Producers - having to pay wages.
Consumers - price paid for a good or service.
What are external costs?
Costs to third parties, i.e. individuals not involved in the transaction.
Give an example of an external cost caused by producers and consumers.
Producers - noise/air pollution from factories.
Consumers - passive smoking.
What are social costs?
Private costs + external costs
NOTE TO SELF:
Revise negative externality graph!
What are private benefits?
Benefits received directly by the producer and consumer in a transaction.
Give an example of a private benefit to a producer and consumer.
Producer - revenue received from sales.
Consumer - the utility gained from the consumption of a good or service.
What are external benefits?
Benefits to third parties, i.e. individuals not involved in the transaction.
Give an example of an external benefit caused by producers and consumers.
Producers - switching to using more eco-friendly machinery.
Consumers - individuals getting vaccination can prevent the spread of disease.
What are social benefits?
Private benefits + external benefits
NOTE TO SELF:
Revise positive externality graph!
What is the definition of a public good?
A good that is both rivalrous and non-excludable.
What does the term non-rivalrous mean?
Consumption by one person does not limit consumption by another.
What does the term non-excludable mean?
If a good is available for one person it is available for everyone.
Give 3 examples of pure public goods.
Street lighting.
Defence systems.
National parks.
What is a quasi public good?
These are goods that have some elements of public goods.
Why would the private sector not provide public goods?
They are non-excludable meaning it is very hard to charge individuals and therefore make a profit, this is not sustainable.
What is the free rider problem?
Once provided, it is impossible to prevent others from using the public good, therefore impossible to charge for it.
What is symmetric information?
Where both parties in a transaction have the same information.
What is asymmetric information?
Where one party in a transaction has more or superior information compared to the other.
Give 2 real life scenarios where asymmetric information could occur.
Housing market - estate agents know more about the potential problems of a house than the potential buyer.
Second-hand car sales - the car sales person knows more about the car than the potential buyer.
