1.3 Market Failure Flashcards
What can subsidies do to positive externality diagrams?
The gov could give a firm a subsidy so they can operate at MSB instead of MPB to correct market failure
What are externalities/ the spill over effect?
the difference between social costs and benefits
and private costs and benefits
A cost or benefit by an economic factor that is not suffered/ enjoyed by that same actor
What are negative externality diagrams?
Shows the externality where Marginal Social Cost (MSC) > Marginal Private Cost (MPC)
MSB = MPB
so theres market failure where MPC=MSB and MPB as thats where the externality is largest
What are positive externality diagrams?
Shows the externality where MSB > MPB
MSC = MPC
so theres market failure where MPB = MSC and MPC as thats where the externality is largest
What are positive externalities?
If social benefit > private benefit, then there’s a positive externality
Means a benefit for a person/ firm will benefit the society even more
E.g someone getting a vaccine
What are negative externalities?
If social cost > private cost, then there’s a negative externality Means a negative impact on someone will have an even worse impact on the society E.g someone drinking
What’s market failure?
Misallocation of resources occurs if market prices don’t accurately reflect the costs and benefits to society of economic activities
What does it mean if goods are excludable?
goods that prevent others from using them
E.g tickets for football matches
What does it mean if goods are rivalrous?
goods, which once someone has brought, is no longer available for anyone else E.g clothing, plane tickets, food
What are private goods?
Goods that are both rivalrous and excludable
What are public goods?
Goods that are both non-rivalrous and non-excludable
The marginal cost of providing a unit of the good is zero
not many pure public goods - E.g the army
What are Quasi-public goods?
a public good that doesn’t fully fulfil the characteristics of non-rivalrous and non-excludable
E.g the Dartford Crossing
Free rider problem
Someone who receives the benefit but allows others to pay for it in a free market
so people could refuse to pay for the public goods in a free market, so taxes are used
Law of diminishing marginal utility
the more you get of something, the less value it has to you explains why wood is cheaper than diamonds
Principal-agent problem
where the principal gains/ looses from the decision but it is made by the agent
What can subsidies do to positive externality diagrams
The gov could give a firm a subsidy so they can operate at MSB instead of MPB to correct market failure
