1.3 Market Failure Flashcards
What is market failure?
Market failure occurs when the market fails to allocate scarce resources efficiently, causing a loss in social welfare.
Name the three main types of market failure.
- Externalities
- Under-provision of public goods
- Information gaps
What is an externality?
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
What are negative externalities?
Negative externalities occur when the social costs are greater than the private costs.
Give an example of a negative externality.
Cars and cigarettes have negative externalities.
What are positive externalities?
Positive externalities occur when the social benefits are greater than the private benefits.
Give an example of a positive externality.
Education and healthcare have positive externalities.
What is under-provision of public goods?
Public goods are underprovided by the private sector due to the free-rider problem.
What is a public good?
A public good is non-rivalry and non-excludable.
What is the free rider problem?
The free rider problem states that individuals cannot be charged for a non-excludable good, allowing others to benefit without paying.
What is an example of a public good?
Streetlights are a good example of a public good.
What are information gaps?
Information gaps occur when economic agents do not have access to all relevant information to make informed decisions.
What is symmetric information?
Symmetric information occurs when buyers and sellers have potential access to the same information.
What is asymmetric information?
Asymmetric information is when one party has superior knowledge compared to another.
What is a merit good?
A merit good is a good with external benefits, where the benefit to society is greater than the benefit to the individual.
