6. Revisiting market failure and government intervention in markets Flashcards
Market failure
Occurs when the price mechanism fails to allocate scarce resources in a productively efficient way and when the operation of market forces leads to an allocatively inefficient outcome
Complete market failure
A market fails to function at all and a ‘missing market’ results
Partial market failure
A market does function but it delivers the ‘wrong’ quantity of a good or service which results in resource misallocation
Missing market
The absence of a market for a good or service, most commonly in the case of public goods and externalities
Private good
A good which exhibits the characteristics of excludability and rivalry
Property right
The exclusive authority to determine how a resource is used. In the case of a private property right, the owner of private property such as a bar of chocolate has the right to prevent other people from consuming it unless they are prepared to pay a price to the owner
Public good
A good which exhibits the characteristics of non excludability and non rivalry
Non excludability
A property of a public good which means if it is provided for one person it is provide for all
Non rivalry
A property of a public good which means that when a good is consumed by one person, it doesn’t reduce the amount available for others
Non rejectability
A property of a public good which means that when a good is consumed by one person, it does not reduce the amount available for others
Free rider problem
Occurs when non excludability leads to a situation in which not enough consumers choose to pay for a good, preferring instead to free ride, with the result that the incentive to provide the good through the market disappears and a missing market may result. (A free rider is someone who benefits without paying)
Quasi public good
A good which has characteristics of both a public and private good - e.g. it may be non excludable but rival, or excludable but non rival
Externality
Occurs when production or consumption of goods / services impose external costs or benefits on third parties outside of the market without these being reflected in market prices. When an external cost is generated, there is a divergence between private and social costs and benefits, there is a divergence between private and social costs and benefits
Negative externality
A cost that is suffered by a 3rd party as a result of an economic transaction. In the transaction, the producer and consumer are the first and second parties, and the third parties include other people or firms affected by the transaction. Pollution is a negative externality when unwillingly consumed by third parties. (Dumped on 3rd parties outside the market)
Positive externality
A benefit that is enjoyed by a third party as a result of an economic transaction e.g. a beautiful garden, visible to third parties
Production externality
When production of a good or service imposes external costs or benefits on 3rd parties outside of the market without these being reflected in market prices
Consumption externality
When consumption of a good or service imposes external costs or benefits on third parties outside of the market without these being reflected in market price
Demerit good
A good for which the private benefits of consumption are greater than the social benefits and for which the long term private benefits are less than the short term benefit
Merit good
A good for which the social benefits of consumption exceed the private benefit and for which the long term private benefits are less than the short term benefit
Moral hazard
The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely
Adverse selection
A situation in which people who buy insurance often have a better idea of the risks than do the sellers of insurance. People who know they face large risks are more likely to buy insurance than people who face small risks
Competition policy
The part of the government’s microeconomic policy which aims to make goods markets more competitive. It comprises policy toward monopoly, mergers and restrictive trading practices
Competition and Markets Authority
Government agency responsible for advising on and implementing UK competition policy
Public ownership
Ownership of industries, firms and other assets such as social housing by central or local government. The state’s acquisition of such assets is called nationalisation
Privatisation
The transfer of assets from the public sector to private sector
Regulation
The imposition of rules and other constraints which restrict freedom and economic action
Deregulation
The removal of previously imposed regulations
Regulatory capture
Occurs when regulatory agencies act in the interest of regulated firms rather on behalf of the consumers they are supposed to protect
