18. Market Failure and Externalities Flashcards
What is Market Failure?
Market failure happens when the forces of supply and demand in a market fail to allocate resources efficiently and leads to a net social welfare loss.
What is a Complete Market Failure?
When the market simply does not supply products at all
What is Partial Market Failure?
When the market does actually function but it produces either the wrong quantity of a product or a product at the wrong price.
What are Negative Externalities?
The social cost of production exceeding the private cost
What are Positive Externalities?
The social benefit of consumption to exceeding the private benefit of consumption
What are the Negative Externalities of Production?
Pollution
Waste
Global Warming
Environmental damage
What are the Negative Externalities of Consumption?
Pollution Waste Congestion Litter Obesity
What are Social Costs?
Private cost + External costs
What are Social Benefits?
Private benefit + External cost
What are Private Costs?
The actual costs of production and/or consumption to a single entity
What are External Costs?
The negative side effects of production and consumption to society
What can Negative Externalities lead to?
Over-production and market failure if the producers do not take into account the externalities
How do Governments try to solve market failure?
Taxing demerit goods
Minimum age restrictions
What causes Market Failure?
Consumption of demerit goods
Imperfect information
Market dominance
Factor immobility
What are the advantages of imposing restrictions on demerit goods?
Reduced consumption
Awareness of the negative impact of demerit goods
Awareness of the positive impact of merit goods
What are the disadvantages of imposing restrictions on demerit goods?
Black markets can develop
Governments lose control of the good if Black Markets develop
Time and effort required to enforce bans
What is a subsidy?
The government paying part of the cost to the firm to reduce the price of a good and encourage consumption
How does a subsidy impact the Supply curve?
Shifts the supply curve to the right
What are Private benefits?
The benefits of production and consumption enjoyed by a single entity
What are external benefits?
The positive side effects that third parties get from the production or consumption of goods and services.
