3) Market Failure (Introduction) - MMT Flashcards
in a free market economy, such as the UK, resources are normally allocated via the…
price mechanism, ie demand and supply
what happens when there is a change in the market conditions?
then prices will adjust, both demand and supply will also adjust, in a short period of time it is expected that equilibrium will be restored in the market
the price mechanism acts as a kind of…
‘invisible hand’ to ensure that the market will operate efficiently, an excess demand or excess supply will only be temporary, change in prices will soon eliminate these excesses
what percentage of goods and services in our economy does the market work well, and what percentage of goods and services in our economy does the market not work properly?
- 75% works well
- 25% doesn’t work well (known as market failure)
definition: when does market failure exist?
market failure exists when the competitive outcome produced by the operation of the free market is not the best outcome for society
definition: when do externalities exist?
externalities exist when the production or consumption of a good or service causes an impact for an unrelated 3rd party
what are the 4 possible types of externality?
- negative externality of production
- negative externality of consumption
- a positive externality of production
- a positive externality of consumption
when does a negative externality of production occur?
this occurs when the process of producing a good or service creates a negative consequence for individuals or groups outside the business
what is an example of a negative externality of production?
a factory making a good might cause harmful pollution in a local area
when does a negative externality of consumption occur?
this occurs when the action of consuming a good or service creates a negative consequence for individuals or groups not consuming it
what is an example of a negative externality of consumption?
an individual consuming too much alcohol may cause damage or harm to others
when does a positive externality of production occur?
this occurs when the process of producing a good or service creates a positive consequence for individuals or groups outside the business
when does a positive externality of consumption occur?
this occurs when the action of consuming a good or service creates a positive consequence for individuals or groups not consuming it
what is an example of a positive externality of consumption?
eg individuals choosing to cycle rather than drive to work may help reduce traffic congestion in the area
what is an example of a positive externality of production?
eg building a new school may improve facilities and education for the local area