3. market failure Flashcards
types of market failure
-externalities
-under provision of public goods
-information gaps
externalities
affects on third parties (often environmental or welfare impacts)
private costs/benefits
the cost/benefit to the individual participating in the economic activity represented by the demand curve is benefits and supply curve is costs
social costs/benefits
the costs/benefits of the activity to society as a whole
a merit good
a good which has external benefits, and they tend to be under provided.
a demerit good
a good with external costs, and they tend to be over provided
externality graphs
production is at MPC=MPB but should be at MSB=MSC. the under/over production/consumption leads to welfare loss
government intervention
-indirect taxes and subsidies
-tradable pollution permits
-provision of the good
-provision of info
-regulation
public goods characteristic
non-rivalry (a persons usage does not stop another’s)
non-excludable (you cannot stop someone using it)
free rider problem
you cannot charge an individual a price for the provision of a non-excludable good
why doesn’t the private sector supply public goods
they cannot be sure to make profits
information gaps
leads to market failure as resources can be misallocated, so demand/ supply may be high/low so quantity and price may not be at social optimum
asymmetric information
one party has more information than the another and can take advantage of this
how do information gaps lessen
has tech develops people have better access to information
