Chapter 4 Flashcards
occurs when a free market fails to achieve Pareto efficiency,
resulting in a loss of overall economic value.
market failure
Economists first introduced the term market failure in
1958.
is the economic situation defined by an inefficient distribution or allocation of goods and services
in the free market.
Market failure
Markets are not Pareto efficient under six important conditions, referred
to as market failures, which provide a rationale for government activity.
- Failure of Competition
- Public Goods
- Externalities
- Incomplete markets
- Information failure
- Unemployment, inflation and disequilibrium
When a single
f
i rm supplies the market, economists refer to it as a
monopoly;
when a few fi rms supply the market,
economists refer to them as
an oligopoly.
Even when there are many fi rms, each may produce a slightly
different good, Economists refer to such situations as
monopolistic competition.
are goods and services that are provided by the government or other entities because the
private market either fails to supply them efficiently or does not supply them at all.
Public goods
Characteristics of Public Goods
- Non-Rival.
- Non-Excludable.
Types of Public Goods
- Pure Public Goods.
- Impure Public Goods.
where individuals benefit from the
good without contributing to its cost.
free-rider problem,
is a product that must be
purchased to be consumed, and consumption by one individual prevents another individual from consuming
it.
A private good
is an economic term referring to a cost or benefit incurred or received by a third party. However,
the third party has no control over the creation of that cost or benefit.
An externality
cause the social benefits of an economic transaction (enjoyed both by private users
who do pay a price for it and free-riders who do not pay anything) to exceed the private benefits that accrue
to the market participants.
Positive externalities
There are two types of positive externalities
positive production externalities
positive consumption externalities
cause the social costs of an economic activity (those borne by the whole society) to
exceed the private costs borne by the market participants
Negative externalities
There are two forms of negative externalities:
negative production externalities and negative consumption externalities.
is a market where some goods or services that people demand are not provided or
are insufficiently supplied by the private sector.
An incomplete market
occurs when one party to an economic transaction
possesses greater material knowledge than the other party.
Information failure or asymmetric information
is a situation in which a party is more likely to take risks because the costs that could
result will not be borne by the party taking the risk. T
Moral hazard
occurs when there’s a lack of symmetric information prior to a deal between a
buyer and a seller.
Adverse selection
occurs when people who are willing and able to work cannot find jobs.
Unemployment
are considered market failures because they represent inefficiencies where
market mechanisms do not function properly to ensure full employment and price stability.
Unemployment and inflation
is a good or service that the government believes is beneficial for individuals and society as a
whole, but which tends to be under-consumed if left to the free market.
A merit good
Examples of merit goods include:
▪ Education – Leads to higher productivity and innovation, benefiting society.
▪ Healthcare (e.g., Vaccinations, Preventive Care) – Reduces disease spread and increases life
expectancy.
▪ Public Libraries – Provide access to knowledge and education, improving literacy.
▪ Museums and Public Parks – Promote cultural awareness and well-being
