1.3 Market Failure Flashcards
What is the definition of market failure?
The misallocation of resources by the market mechanism
What are the 4 types of market failure?
- Public goods
- Positive externalities in consumption
- Negative externalities in production
- Asymetric information
+ Price Voltality, not in spec
What is asymetric information?
When one party in the transaction has more information than the other
What are public goods?
Goods that if left to the market mechanism, would not be provided and hence need to be provided by the government
e.g - schools, parks, roads
What is the free rider problem?
Some consumers may avoid payment and benefit without contributing to the cost of provision
Provision: the action of providing or supplying something for use.
What are the 3 characteristics of public goods?
- Non excludability - no one can be excluded
- Non rejectable - we cannot avoid it/ opt out
- Non rivalry - consumption does not reduce availability for others
What are examples of pure public goods?
- National defence system
- Sewage and waste disposable system
- Lighthouse protection
- National rail safety systems
- Street lighting
- Firework displays
What are semi-public goods?
There is an element of excludability or rivalry in consumption
Examples:
* gallaries and museums
* police force protection
What are marginal private costs (MPC)?
The costs that the producers pay in making the product
What are the marginal external costs (MEC)?
The costs to third parties not directly involved in the transaction
What are marginal social costs (MSC)?
The true costs to all of society
What are externalities?
A spill-over effect from production and/or consumption where no compensation is paid to third parties
What are private costs?
Paid by the producers/consumers, also known as internal costs
What are external costs?
When your production/consumption imposes a cost for a third party
What are private benefits?
The benefit recieved from producing or consuming something
What are external benefits?
The benefit to a third party from production/consumption
What is marginal private benefit (MPB)?
The extra benefit or utility gained by a consumer or producer through consuming or producing one extra unit of a good or service
What are marginal private costs (MPC)?
The internal costs to a producer or consumer from supplying or consuming one extra unit of a good or service
What are marginal external costs (MEC)?
Costs to third parties from the production/consumption of one extra unit of output
What are marginal social costs(MSC)?
The total costs to society arising from producing/consuming an extra unit of output
MSC = MPC + MEC
Social costs = Private costs + external costs
What are marginal social benefits (MSB)?
The benefit to a third party, not directly involved in the transaction
