9- Types of Market Failure definitions Flashcards
Market failure
When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources.
Social optimum position
Where social costs equals social benefits.
The amount which should be produced/consumed in order to maximise social welfare.
Externalities
The cost or benefit a third party receives from an economic transaction outside the market mechanism.
Public goods
Goods that are non-excludable and non-rivalrous.
Private goods
Goods that are rivalrous and excludable.
Free rider principle
People who don’t pay for a public good still receive benefits from it so the private sector will under provide the good as they cannot make a profit.
Non-excludable
A characteristic of public goods.
Someone cannot be prevented from using the good.
Non-rivalrous
A characteristic of public goods.
One person’s use of the good does not prevent someone else from using the good.
Asymmetric information
When one party has more information than the other, leading to market failure.
Symmetric information
Where buyers and sellers both have access to the same information.
Information gap
When an economic agent lacks the information needed to make a rational, informed decision.
