(8) Market Failure Flashcards
Ad valorem taxes
Taxes that are a percentage of price
Asymmetric information
When one party has better information that another in a transaction
Demerit good
Goods where the social costs in consumption outweigh the private costs
Economic welfare
Quality of life of a population
Externality
External effects imposed on society from consumption or production
Free rider problem
Once a public good is produced, there is no way to control who benefits from it
Gov failure
Where gov intervention leads to a lessening of economic welfare and a misallocation of resources.
Imperfect information
When an economic agent does not hold all the necessary information to make decisions
Market failure
Occurs when the market mechanism fails to allocate scarce resources
Non-excludable
A good or service where you are unable to prevent non-paying consumers from benefiting or using the good
Non-rival
Where one persons consumption of a good or service does not decrease the amount available for consumption by another consumer
Outsourcing
When a private sector firm bids to offer a public service
Partial market failure
Occurs when the market is producing a good or service, but at the wrong quantity or price
Price mechanism
The way in which prices are determined through forces of supply and demand
Private good
An excludable and rival good
Productivity gap
The difference between productivity of uk labour and other countries’ labour
Property right
Legal ownership of a resource
Public good
A non-excludable, non-rival good
Signalling
Where a change in the price of goods or services that show that supply or demand should be adjusted
Specific taxes
Taxes that are a set price per unit
Unintended consequences
When the actions of people or a government have consequences that were not anticipated
3 Functions of the price mechanism
Rationing, incentive and signalling
Rationing
Scarce supply mean prices increase due to excess demand
Types of market failure
Externalities, under-provision of public goods, information gaps, monopolies and income and wealth distribution
