Chapter 6 Flashcards
Define market failure
Occurs when the price mechanism fails to allocate scarce resources in a productively efficient way
What is resource allocation and Misallocation ?
Resources allocation is about how factors of production or inputs into the Production process our allocated between competing uses. The best possible way to allocate resources because one factors of production are employed and productively efficient way and also in a way which maximises social welfare or the happiness of the population
What is the difference between complete market failure and partial market failure ?
Complete market Failure is one the market simply does not exist. Porsche market is one the market functions but produce is the wrong quantity of a good or service therefore it is overproduced or overconsumed such as in a monopoly
What is a private good?
A good which examines the characteristics of excludability and rivalry. The owners can exercise private property rights
What is property rights?
The exclusive authority to determine how resources used. In the case of a private property right the owner of a private property such as a bar of chocolate in a sweet shop has the right to rent all the people from consuming a ball unless they are prepared to pay a price to the owner
What is the third characteristic of private goods possesses
Rejectability people can opt out and refuse to purchase private goods
What does non-excludability mean
That it is impossible to provide are good to one person while preventing others from enjoying it
What is non-rivalry
When are good is consumed by one person it does not reduce the amount available for others
What is the free rider problem
Free riding occurs when people decide to gain the benefits of a good or service while refusing to pay for it
What is it quasipublic good
A good which has characteristics of both of public and private goods and might not be excludable but rival
Name one example of a quasi-public good
Roads can be converted into private goods arriving for profit through market this could be done by limiting points of access by constructing tollgates without introducing the scheme of electronic road pricing
What is the marginal cost of providing a public good to an extra consumer
0, allocative efficiency the forecast price is equal to 0 and the good it’s free for consumers. However private entrepreneurs will only provide goods of profit can be made for this to happen the past must be above zero price must be greater than zero
Why does public goods lead to market Failure
Members of the general public cannot be excluded from enjoying the goods benefits
Examples of government provided goods
Defence police and Roads education and healthcare
What is a public bad
When people are prepared to pay a price of would consuming a bag such as household rubbish they produce. If a private sector company tries to charge a price for rubbish removal households me avoid paying the price by dumping the garbage this is why local authorities empty dustbins without charging financing rubbish removal through local taxation
What is an externality ?
This occurs when production or consumption of goods or services imposed as external costs or benefits on third-party is outside of the market without this be reflected in market prices when externality is generated there is a divergence between private and social costs and benefits
What is a negative externality
They cost that suffered by third-party as a result of an economic transaction in the transaction the producer and consumer are the first and second parties and third parties include any other people or firms that are affected by the transaction
What is a positive externality
A benefit that is enjoyed by a third-party as a result of an economic transaction
When does private benefit maximisation Take place
When marginal private benefit is equal to marginal private cost
When does social benefit maximisation take place
When marginal social benefit is equal to marginal social cost
What do Orthodox or traditional economic theory assume about households
They seek to maximise their own private benefit also interests and not the wider social interest of the whole community they ignore the affects of the actions and other people
What is the formula for social benefits
Marginal social benefit is equal to marginal private benefit plus marginal external benefit
What is the formula for social cost
Marginal social cost is equal to marginal private cost plus marginal external cost
One can allocate of efficiency early a car
If there were competitive markets for goods and services including future markets. There were no economies of scale. Markets were simultaneously in equilibrium
When will there be no externalities or negative or positive
The price is equal to marginal cost
If we ignore the four bullet points and which allocates of efficiency would occur what happens
In the long run profit maximisation of cost and the perfect market answer the price at which price is equal to marginal private cost in the absence of external see this also means that the price equals a marginal social cost of production but as we have seen on the production of a good cause pollution external costs are generated with the result that marginal social cost is greater than was your private cost this means that one price is equal to marginal private cost price is less than marginal social cost
What is production externalities you
When production of a good or a service of persons external costs or benefits on third-party is outside of the market without this being reflected in market prices
What is consumption externalities
When consumption of a good or service imposes external costs or benefits on third-party is outside of the market without this being reflected on market prices
