1.3 Market Failure Flashcards
What are the three causes of market failure?
Information gaps
Externalities
Under provision of Public Goods
What is an Externality?
A cost or benefit incurred to a third party as a result of an economic transaction outside of the market mechanism
What is a private cost/benefit?
A cost or benefit incurred by those involved in a transition. The supply line represents private costs and the demand line represents private benefits.
What is a social cost/benefit?
This is the total impact on society as a result of a transaction
What is an external cost/benefit?
This is the impact of a transaction on third parties not involved in the transaction, it is the difference between the social cost/benefit and private costs/benefit.
What is a merit good?
A good with a greater external benefit than private benefit. Under-provided in the free market
What is a demerit good?
A good with greater external costs than private costs. Over-provided in the free market
What are characteristics of public goods?
They are non rivalrous and non excludable
What does non rivalrous mean?
One persons consumption of the good does not affect another persons ability to consume it
What does non excludable mean?
When one person has access to that good there is no way to stop everyone from having access to that good.
What is the free rider problem?
The private sector will not provide a public good as they cannot profit off of it. However, when the public sector provides it, there will always be free riders who do not pay for it, therefore the free rider problem is when people do not pay for public goods as they will be able to access them either way.
What is symmetrical information?
When both buyer and seller have the potential access to the same information.
What is asymmetric information?
When one party has access to more information than the other, leading to information gaps.
