1.3.1 t- types of market faliure , public goods, infomation gaps Flashcards
Efficent equalibrium
Where there is most benefit for the lower cost
Market failure
when the price mechanism leads to a missalocation of resources
What can market faliure occur from
- Positive externalities
- negative externalities
- Public goods
- information gaps
Negative externalities
Costs which affect third parties outside the price mechanism
Negative consumption externalities
are caused when there is a negative externaltity of the consumption from a consumer
Negative production externalties
caused when there is a negative externality of production from producers
Supply curve shows
marginal cost (MPC)
Demand Curve
margninal benefit (MPB)
Social costs =
Private costs + external costs
Social benefit =
Private benefit + external benefit
Welfare =
Social benefit - social cost
How is overproduction shown
The differnce between the quantitiy Free market and the Free market equalbrium of the social optimum quantity
Postive Consumption externalties
Benefits of a transaction that affect third parties outside the price mechanism
What will happen if producers dont take into account the external benefits
This will result in under production and under consumption
Positive production externalties
The cost incurred by the third party outside of the price mechanism from the production of a producer
How can we solve under production
Subsidies - they reduce underconsumption or under production by providing a payment from the government for every additionaal unit of output from the producers
Information gaps lead to ?
- Lead to underconsumption as consumers are unaaware of the benfits of a good or service leading to market faliure
- Can also lead to overconsumption of goods and services such as cigarettes and drugs
What can be done to solve information gaps
Governments intervenes with regulations, info, substidies or bans advertising and taxing
Asymmetric information
- This exists when one party (buyer or seller) has more information then the other. The advantaged party can therefore exploit that information gap
Moral hazard
When an economic agent makes a decision on their own best interest knowing that problems or risks may arise, the cost of which will be borne by other parties
Information gaps in the cigarette market
- in free market consumers have info gaap as they are unaware how unhealthy cigarettes are
- Government has made compulsory to have health warnings on cigarrette packages
info gaps in Car inssurance
- Insurer has info gap. they do not know the quality of the drivers hence the consumer will take the asymmetric information advantage.
- Get drivers to sign a legal document declaring your driving history
Principal agent problem
When a problem occurs when a economic agent makes a decision that is in their own interest rather than the interest of the principal
Government intervention in info gaps
provide or make the morally hazardous person declare the information
Free rider problem
Occurs when someone can receive the benefit of a good or service without paying for it
Public goods have two charactersitcs
- Non - Rivalry in consumption of the good - one persons consumption does not affect how much someone else can consume
- non - excludablitity in consumption of the good - it is not possivle to prevent somone from consuming all the good
A private good has two characteristics
- rivarly
- excludablility
why is non excludability a problem in the free market
becuase no one has an incentive to pay for the good or service
How do we solve the Free rider problem
Through state provision
