1.3 market failure - definitions Flashcards
Market failure
when the free market causes an inefficient allocation of resources
-insufficient information
-public goods
-underconsumption of goods with positive externalities and vice versa
Externalities
These are the costs or benefits that are ignored in a market exchange
Private Costs
These are the costs involved that only the individual consumer or producer cares about.
External Costs
These are the costs from production or consumption of a good that neither producers nor consumers pay
Social Costs
Private costs + external costs
Private benefits
These are the benefits involved that only the individual consumer or producer cares about.
External benefits
These are benefits that other people get, who were not directly involved in the market exchange
Social benefits
Private benefits + external benefits
Social optimum equilibrium
Where Marginal Social Costs equal Marginal social benefits (MSC=MSB). This is the welfare maximised version of S=D
Public goods
Goods that are non rivalrous and non excludable
Non excludable
When you have produced the good and sold it to one person, it is impossible to stop other people from using it
Non Rivalrous
This means that as more and more people use the good or service, the amount available to others is NOT reduced
The free-rider problem
If you provide a good to one person you have provided it all. People will just come along and use it without paying
Asymmetric information
When consumers and producers often have different amounts of information. one group will have an advantage by knowing more
Symmetric information
When both consumers and producers have perfect information about the good they are exchanging
