2.10 Market Failure Flashcards
When does a market failure occur
When free markets fail to produce outcomes in terms of prices and quantities that are socially or economically desirable.
2 Types of market failure
Under allocation of resources
Over allocation of resources
Consequences of market failure
Public goods aren’t provided
Demerit goods are overprovided
Firms may exploit consumers and employees
Merit goods are underprovided
DP MFs
Explain public goods aren’t provided
Since they these goods cannot generate profit, firms may not provide it.
Explain demerit goods are overprovided
These goods are inelastic and firms may try to reap all the profit they can by over allocating resources.
This would lead to overconsumption of these goods.
Explain firms may exploit consumers and employees
Firms may start dictating prices and working conditions to consumers and employees respectively
What are Externalities
The impact the consumption and production of a good or service has on a third party.
Who is a third party (externality)
An entity not involved with the consumption or production of a good or service.
What are the 2 Types of externalities
External benefits
External costs
What is external benefit
Benefit the third party.
What is external cost
cost incurred by the third party.
Effects them negatively
What is private cost
Cost beared by an individual
What is social cost
Beared by society
External cost + private cost
Examples of external benefits
Eg: Vaccine, or new mall being built increasing the value of your house.
Example of external cost
eg: passive smoking
