CH16 Types of market failure Flashcards
When does market failure occur?
When markets do not function efficiently or equitably
what do sources of market failure include?
Sources of market failure include externalities, public goods and information gaps.
in some cases, what are the two ways in which markets can fail?
-Markets may lead to the overproduction or underproduction of goods; this is known as partial market failure;
-Much more rarely, markets may not exist (known as missing markets), leading to no production of a good or service; this is known as complete market failure.
in reality, why may market prices and profits be misleading?
Because they may not reflect the true prices and profits to society of economic activities. For instance, in Brazil it makes commercial sense to cut down the rainforest to create grazing land for cattle sold to the West as meat for hamburgers. However, this could lead to economic catastrophe in the long term because of global warming. The market is putting out the wrong signals, leading to misallocation of resources.
the market may fail to provide what? Give an example of this?
May fail to provide certain goods and services, or may under provide them. One example of this is in the provision of public goods.
What are public goods?
These are goods such as defence, street lighting and policing.
what is one key reason for the under-provision of public goods?
One key reason is that it is relatively easy to gain the benefits from the good without having to pay for it. There is then a large incentive for individuals not to pay for the good in the hope that someone else will pay for its provision. The result is that public goods are under-provided if left to free market forces.
In an efficient market, both buyers and sellers have what?
Both buyers and sellers have good knowledge of the product. Sometimes, though, information is imperfect. E.g. a consumer buying a soft drink is likely to have tried out a variety of drinks before. The drink being bought is likely to be something the consumer likes and so the consumer has good information about the product. However, what about the purchase of a washing machine which the consumer might only make every eight years? In this case the consumer might have imperfect information and make the wrong choice.
what is asymmetric information?
This is when either the buyer or seller has more information than the other party. One example is private dentists. If a dentist recommends treatments when patients are not in any pain, how do patients know that the treatments are really in their best interests? Could it be that the dentist is recommending far more work than is necessary and is more interested in gaining a fee than in treating the patients properly?
