2.10 Market failure Flashcards
1
Q
What is market failure
A
The inefficient allocation of resources
2
Q
Give examples of market failure
A
- Over-provision of demerit goods (e.g cigarettes)
- Under-provision of merit goods (e.g. schools)
- Lack of equity
- Environmental damage caused by the production or consumption of a good/service
3
Q
Social cost formula
A
Social cost = private cost + external cost
4
Q
Social benefit formula
A
Social benefit = private benefit + external benefit
5
Q
What are externalities
A
Externalities impact third-parties. can be positive or negative
6
Q
When do external costs occur
A
When social cost > private cost
7
Q
When do external benefits occur
A
When social benefit > private benefit
8
Q
What can the government do to address market failure
A
- Set a minimum price
- Set a maximum price
- Subsidies
- Indirect tax
9
Q
What are the causes of market failure
A
- Over-provision of demerit goods
- Under-provision of merit goods
- Monopoly power
- External costs/benefits
- Factor immobility
- Public goods (non-rivalrous and non-excludable)
10
Q
Draw a minimum price graph
A
11
Q
Draw a maximum price graph
A
12
Q
Draw a subsidy graph
A
13
Q
Draw an indirect tax graph
A
