1.3 Market failure Flashcards
What is market failure?
When the market fails to allocate scarce resources efficiently
What is an externality?
A cost or benefit on a thirty party during a transaction
Three main types of market failure
Externalities
Under-provision of public goods
Asymmetric information
What is under-provision of public goods?
Underprovided public goods due to them being non-rivalry and non-excludable
What is a merit good?
A good with external benefits
What are private costs/benefit?
A cost/benefit to the individual participating in the economic activity
What curve, demand or supply shows the private cost or benefit?
Demand=private benefit
Supply=Private cost
What is social costs/benefits?
A cost/benefit of the activity to society as a whole
What is a external cost?
A cost/benefit to a third party not involved in the economic activity
Examples of gov. intervention to ensure the market considers the external costs and benefits
Indirect taxes and subsidies
Tradable pollution permits
Provision of the good
Provision of information
Regulation
What is a free rider?
Someone who receives the benefit without paying for it
What is asymmetric information?
When one party has superior knowledge compared to another
What is symmetric information?
When buyers and sellers have potential to access the same information
