1.3 - Market Failure Flashcards
What are the three types of market failure
- Externalities
- Under-provision of public goods
- Information gaps
Define private costs/benefits
The costs/benefits to the individual participating in the economic activity
What do the supply and demand curves represent on an externality diagram
Demand = private benefits
Supply = private costs
Define social costs/benefits
The costs/benefits of the activity to society as a whole
Define external cost / benefit
The cost/benefit to a third party not involved in the economic activity
What types of goods are over and under provided by the free market
Over-provided= demerit
Under provided = merit
What shift does a negative externality in production cause
Supply shifts right so MSC is greater than MPC
What shift shows a positive consumption externality
Demand shifts right so social benefit is greater than private benefit
Give 3 ways the government can intervene to ensure the market considers externalities
- Indirect taxes and subsidies
- Regulation
- Provision of information
What are the 2 main characteristics of public goods
Non- rivalry and non-excludable
What is the free rider problem
You cannot charge an individual for a good that is non-excludable as someone else will benefit without paying
