1.6 Classification of goods and services Flashcards
Resource allocation in a free market?
The free market often fails to allocate resources in a way that is best (optimal) for society.
Why is there market failure in a free market?
The market allocates too many resources to products that are harmful to society and too
few resources to products that are
beneficial for society.
What is market failure?
The failure of the market to provide the optimal allocation of
resources to certain goods and services.
What are the two types of market failure?
Missing markets for public goods
Under-provision of merit goods and
over-provision of demerit goods
What is an example of a public good?
Examples include, national defense, a
light house, street lighting.
What are the characteristics of a public good?
- Non-Excludable
- Non-Rivalrous
- Non-Rejectable
- Marginal production cost of 0
What does non-excludable mean?
Once the good has been provided, it is impossible to stop anyone from consuming it.
What does non-rivalrous mean?
Consumption of the good by one individual does not diminish the
quantity available to others.
What does non-rejectable mean?
Once provided, it is impossible for anyone to reject the good.
What does a marginal production cost of 0 mean?
once it is produced, there is no additional cost for any additional consumers
What are the three characteristics of a private good?
- Excludable
- Rivalrous
- Rejectable
What is a quasi-public good?
goods that have some of the
characteristics of private goods and some characteristics of public goods.
Why does a market economy fail to provide public goods?
due to the free rider problem.
What is a free good?
a good that can be produced at zero opportunity cost.
What is the free rider problem?
it is impossible to charge
a price to those who benefit from them
Why does a market economy fail to provide merit goods?
Due to the lack of knowledge of their benefits?
