1.3 Market failure Flashcards
Define market failure
Market failure is where the free market mechanism fails to allocate resources efficiently and therefore social welfare maximisation.
Define non- rival
my consumption of a good doesnt affect the consumption for others
Define non- excludable
Once provided, its difficult to stop non- payers from using it, which leads to the free rider problem
include characteristics
Examples of quasi- public goods
semi-non- rival: up to a point, beaches become crowded as do parks/ leisure activities. Open- access Wifi networks become crowded
semi- non- excludable: It is possible but difficult or costly to exclde non-payers consumers e.g. fencing a park or beach and charging a entrance fee
Free- rider problem
- Becuase public goods are non-excludable it is difficult to charge people for benefitting once a product is available
- Given firms are profit maximisers, pure public G/S are not normally provided by the private sector as they would be unable to supply them for a profit
- The free- rider problem leads to under- provision of a good and thus causes market failure
Which economic agent provided public goods to economy
- Govt decides what output of public goods/ funding of public goods is appropriate for society
- To do this, it must estimate the net social benefits from making public goods available
- Using cost- benefit analysis
Define assymetric infomation
- Producers know more than consumers
- Imperfect infomation
Optimising our own self interest
Tragedy of the commons
The pursuit of individual self interest is often not good for social efficiency, which leads to long term depletion of resources
Define adverse selection
- Adverse selection occurs when information asymmetry leads to the selection of unfavorable or risky choices.
- In markets with imperfect information, buyers may be more likely to purchase lower-quality or riskier goods or services because they cannot differentiate between high and low quality.
Give an example of adverse selection
Example of Adverse Selection: In the health insurance market, if insurers cannot accurately assess an individual’s health status, they may attract more high-risk policyholders, leading to higher premiums and potentially driving healthier individuals away
How might infomation gaps lead to food waste
- Food suppliers lack market info eg predicting size of harvests - dependent on climate, pest control, disease/ time lags in growing crops
- Supermarkets lack market info, eg, predicting household demand- depends on tastes and fashion which might change/ impact competitors
- Consumers lack market info eg uncertainity over how to store food or whether food is fit for consumption after sell-by-dates
4 marks
In the USA research found that 68% of those without health insurance and 88% of those with health insurance visited a dentist. With reference to health insurance, explain what is meant by ‘moral hazard’
- Where the consumer does not suffer from the consequences
- 68% of those without health insurance visited a dentist but 88% of those with health insurance visited a dentist
- The consumer is more likely to smoke/eat sugary food/drink fizzy drinks as any healthcare costs to treat teeth are covered by the insurance policy
- The consumers that are insured take more risks with their health and are therefore more likely to need healthcare and make a claim/ so they are less careful with their health
4 marks
Emiliana Lucas owns a farm in Tanzania on which she grows sunflowers. In 2020 Tania, her neighbour, started a honey bee farm. The honey bees pollinated Emiliana’s sunflowers. As a result, seed production on Emiliana’s farm increased from 300kg in 2019 to 620kg in 2020. With reference to the information provided, explain the difference between private benefits and external benefits.
Private benefits: the benefits received by producers/consumers directly involved in an economic transaction
Define private benefit
- Private benefits: the benefits received by producers/consumers directly involved in an economic transaction
- External benefits are benefits received by third parties who are not part of the economic transaction.
- Private benefit: Benefits to her neighbour, Tania, of earning revenue through selling honey
- Private benefit: Benefits to Emiliana of earning revenue through selling sunflower seeds
- External benefit: Emiliana’s production increased from 300kg of sunflower seeds to 620kg of sunflower seeds
Define external benefit
External benefits are benefits received by third parties who are not part of the economic transaction.
Define social benefit
Social benefits represent the total benefits of an economic activity, including both private benefits and external benefits.
Define externalities
The spillover effects of an economic activity that affect third parties who are not directly involved in the transaction
