1.3 Market Failure LS17-19 Flashcards
What is market failure?
- Too much/little of a good is produced/consumed compared to socially optimum level of output
- OR price mechanism leads to an inefficient allocation of resources
What are the types of market failure?
- Externalities
- (Under-provision of) Public goods
- Information gaps in the market
External costs?
Costs to a third party as a result of an economic transaction of a specific good/service where they are not involved in the transaction
eg. smoke, alcohol
External benefits?
Benefits to a third party as a result of an economic transaction of a specific good/service where they are not involved in the transaction
Rivalry meaning?
What type of goods/services are typically rivalrous?
When consumption of a good/service prevents another person from also consuming that product
Private goods i.e. a sandwich
Non-rivalry meaning?
What type of goods/services are typically non-rivalrous?
When consumption of a good/service does not prevent another person from also consuming that product
Public i.e. police
Non-excludabability meaning?
What type of goods/services are typically non-excludable?
Once a good/service is provided, it is impossible to stop people from using it
Public i.e. national defense
Private goods/services?
Goods/services which firms are able to provide to generate profits
* Rivalrous, excludable
Public goods/services?
Beneficial to society, not provided by firms due to
* Non-rivalry, non-excludability
What is the free-rider problem?
- When everyone is able to benefit from a public good
- Individuals are able to access/use a good without paying for it
- Can lead to underprovision of public goods and market failure
Social benefits?
= Private benefits + External benefits
Social costs?
= Private costs + External costs
If positive externalities are present, will social benefits be > or < than private benefits?
Social benefits > Private benefits
If negative externalities are present, will social costs be > or < than private costs?
Social costs > private costs
What are the consequences of external benefits?
Underproduction in a free market
What are the consequences of external costs?
Overproduction/overconsumption in a free market
Perfect information?
When a buyer and/or seller has a complete understanding of the quality and nature of a good or service
Symmetric information?
When buyers and sellers have equal amounts of knowledge about a good or service
Imperfect information?
When a buyer and/or seller lacks a complete understanding of the quality and nature of a good or service
Asymmetric information?
When a buyer or seller has more information about a good or service than the other party
Information gap?
When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision
