chapter 16 Flashcards

1
Q

market failure

A
  • the failure of unregulated market system to achieve allocative efficiency
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2
Q

reasons for market failure

A
  • market power
  • presence of an externality
  • type of good dealth with is a public good
  • imperfect information
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3
Q

market power

A

occurs because

  • only a few firms can operate at low cost - as firm gets bigger cost of production decreases making it harder for other firms to enter
  • firms sell differentiated products and have some ability to set prices
  • firms innovate and gain a temporary monopoly
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4
Q

externalities

A
  • cost or benefit to an external third party
  • external cost: too much produced, corrected with taxes, social MCs > private MCs
  • external benefit: too little produced, corrected with subsidies or providing goods
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5
Q

private cost

A
  • value of best alternative use of resources used in production as valued by producer
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6
Q

social cost

A
  • value of best alternative use of resources as valued by society
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7
Q

rivalrous good

A
  • if ones person’s consumption of one unit of good means that no one else can also consume it
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8
Q

excludable good

A
  • when people can be prevented from consuming good
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9
Q

rivalrous and excludable goods:

A

private goods

- ex. an hour of legal advice, a seat on a plane

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10
Q

rivalrous and non excludable goods

A
  • common resource properties

- ex. envronment

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11
Q

non rivalrous and excludable goods

A
  • club goods

- ex. art galleries, roads, cable tv

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12
Q

non rivalrous and non excludable goods

A
  • public goods

- ex. national defence, public information

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13
Q

public goods

A
  • since non excludable, cant prevent anyone from using them once provided
  • presents free rider problem, so gov needs to provide public goods
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14
Q

free rider problem

A
  • if provider charged a price, non payers would take a free ride at the expense of those with a social conscience
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15
Q

what public goods should be provided

A
  • goods whose benefits > costs

- if cost collection from individuals is infeasible, covering costs of provision means that taxation is unavoidable

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16
Q

generating market demand curve for private good

A
  • add individual demand curves horizontally

- for a given price add individual quantities

17
Q

generating demand curve for a public good

A
  • to construct demand curves for a public good add the individual demand curves vertically
18
Q

optimal provision of a public good

A
  • societies marginal benefit = sum of individual marginal benefit curves
  • allocatively efficient quantity is Q* (MB = MC)
19
Q

imperfect information

A
  • lack of info leads to inefficiency
  • uncertainty that can be reduced if more effort/resources are invested in getting indo
  • or uncertainty that cant be eliminated due to the nature of the market or incentives to not disclose true info
  • one party can often take advantage of special knowledge that can change nature of transaction
20
Q

asymmetric info

A
  • one party has more info than the other
  • invisible hand doesnt assure that optimal amount of info will be available to consumers
  • buyers and sellers not equally informed about characteristics of goods
21
Q

why are differences in who knows what a problem

A
  • adverse selection and moral hazards
22
Q

adverse selection

A
  • tendency of people who are more at risk than average to purchase insurance and for those who are less likely to purchase insurance
  • ex. sickly more likely to purchase
23
Q

moral hazard

A
  • when one party has both incentive and ability to behave in a way that shifts costs to other party
  • arises from insurance contracts- ex. not installing a smoke alarm bc u have insurance
24
Q

adverse selection: lemons model

A
  • asymmetric info reduces average quality of goods offered for sale
  • after you buy a car, more likely to sell if its a lemon
  • buyers know that cars in used car market are more likely to be lemons
  • price buyers for used cars falls
  • makes it more likely for owners of good cars to not sell
  • death spiral
25
Q

strategies to curb problem

A
  • screening
  • signalling
  • reputation
26
Q

screening

A
  • use observable info to make inferences about asymmetric info
  • ex. auto insurance requests background info
27
Q

signalling

A
  • through actions that credibly reveal what they know
  • ex. jane can offer a warranty to tom to sell her car at 11 000
  • ex. brand names
  • costly to fake principle
28
Q

moral hazard insurance solution

A
  • tendency to exert less care or allocate fewer resources in preventing losses that are insured
  • individuals can influence probability that they will experience a loss at a cost to themsleves
  • if someone is completely insured, no benefit to reducing risk
  • insurance companies rarely insure at 100%