3.1.15 types of market failure Flashcards
define market failure
Market failure is when consumers or producers’ pursuit of self-interest leads to a situation where
resources are allocated in ways that do not maximize the economic welfare of all members of
society and national living standards.
what is a rivalrous good
Means that when one individual consumes said goods → reduces the amount thats available for another
individual to consume
what is an excludable good
Means that the supplier for the goods can prevent someone else from consuming a product unless they
pay the price offered for it in the market.
what are Public goods
Goods and services which can be accessed by any member of the public (in theory).
Are public goods excludable, explain
Non excludable – The supplier can’t stop someone using the good even if the person
has not paid e.g. Street lights
are public goods rivalrous
Non depletable / Non-rivalrous – the consumption of the product does not mean less for
other consumer
what problem can public goods lead to
Public goods can lead to the free rider problem – a person who receives benefit from a
public good but doesn’t pay for it
->Profit-making businesses in competitive markets won’t enter an industry where
they can’t charge customers to make a profit
what is externalities
Externalities is when a person is engaged in a transaction/activity that affects the wellbeing of a
third party who is not involved in the transaction.
what is a positive externality
Occurs when a third-party benefits from production or consumption
why do positive externalities cause an under allocation of resources, inefficiency and thus market failure
market is unwilling
to allocate the resources because they CANT CAPTURE THE EXTERNAL BENEFITS that arise in
the production or consumption of the goods or services
what is a negative externality
Occurs when a cost is imposed on the third party
how does negative externalities lead to market failure
Negative externality can impose costs on society by reducing living standards or
increasing productions cost for other firms
This is the opposite of allocative efficiency - where the market maximizes the ability to
meet the needs and wants of society = market failure
an example of negative externality in consumption
Smoking a cigarette → fumes pass on to a bystander imposing a cost on them → reduced
enjoyment of life and unnecessary costs on a third party
an example of a negative externality in production
Factory next to river → dumps waste into river → pollutes environment → imposes a cost onto
the third party members of society
an under production or under allocation of resources is…
positive externalities
an over production or over allocation of resources is…
negative externalities
what is asymmetric information
Asymmetric information is when one party knows more about the good or service than the
other
how does asymmetric information lead to market failure
This leads to the buyer or seller altering their behavior and can lead to excessive prices
or inefficient allocation of resources → Market Failure
Therefore → government can intervene to ensure consumers and producers are protected
from asymmetric information and can make better decisions.
what is a common access resources
The exchange of goods and services in the market typically benefits all parties involved. Most
goods traded are private goods, which have defined ownership and market prices.
how does common access resources lead to market failure, is this good rivalrous and excludable?
common access resources differ as they are non-excludable (available to
everyone) but rivalrous (use by one person reduces availability for others).
The lack of excludability and the absence of prices naturally leads to excessive production and
consumption of goods that use up valuable common access resources.
subsides
Can be provided for substitutes of goods and services that cause fewer negative
