1.3.1 - 1.3.2 Flashcards
Types of market failure & Externalities
Market failure
When the market left to its own devices fails to produce an efficient allocation of resources
Partial market failure
When a market exists but fails to allocate resources at the socially optimal level eg. over produces and consumes in the case of negative externalities eg. pollution or alcohol
Complete market failure
A missing market due for example to the free-rider problem associated with public goods eg. street lights or nuclear defence
Externailites
Impacts falling on third parties as a result of the actions of market participants
Private goods
Goods and services that are rival and excludable. Health and education are examples of this
Rival
Consumption by one diminishes the good for others
Excludable
Consumers who have not paid for the food or service can be “excluded”/prevented from consuming it
Public good
A good that is non-rival and non-excludable
Quasi-public
A good or service with some of the characteristics of a public good or only some of the time eg. road, beach
Common-pool resource
A good which is rival but non-excludable eg. deep sea fish stock or clean air/atmosphere
Third parties
People outside the market
Private (cost/benefit)
Relating to market participants - firms and consumers
Negative externality
When the impact on third parties is adverse
Positive externality
When the impact on third parties is beneficial
Merit good
A good associated with myopic information failure, possibly a positive consumption externality and where society may judge people should be able to benefit irrespective of their ability to pay eg. healthcare, education
Social
Private + external
Privately optimal level of production / consumption
Where MPC = MPB (marginal private cost = marginal private benefit) - (ie. where the market will reach equilibrium left to its own devices)
Socially optimal level or production / consumption
Where MSB = MSC (marginal social benefit = marginal social cost) - (this is where we want to market to be - where all costs and benefits are taken into account)
Welfare loss triangle
The loss to society of failing to produce at the socially optimal level (conversely this is the gain when the market failure is corrected)
Marginal social benefit
MPB + consumption externality (in the case of a negative externality the externality will be negative and in the case of a merit goof the MPB will be incorrect due to the information failure)
Marginal social cost
MPB + production externality
Mixed externality
An externality affecting both production and consumption eg. road use
The social optimum is where MSB=MSC
Marginal social cost and marginal social benefit include all the costs and all the benefits and not jut the ones associated with the market participants. This means the social optimum at MSB=MSC reflects all costs and benefits
The market left to its own devices reaches equilibrium at P,Q
The analysis assumes market participants are rational. This means they maximise their self interest and they ignore the costs falling on third parties. this means equilibrium will occur where MPC=MPB.
