chat GPT market failure Flashcards
What is market failure?
Market failure occurs when the competitive outcome of markets is not efficient or equitable, meaning resources are not allocated optimally.
What is partial market failure? Provide examples.
Partial market failure happens when a market exists but supplies the wrong quantity of a product. Examples include:
- Negative and positive externalities
- Information gaps
- Market concentration and frictions
- Irrationality (behavioral economics)
- Inequality
- Volatile prices
- Merit and demerit goods
What is complete market failure? Give examples.
Complete market failure occurs when a market does not supply a product at all, resulting in a missing market. Examples:
- Public goods
- Information failure (asymmetric information)
- Lack of property rights
What is allocative efficiency?
Allocative efficiency occurs when price (P) equals marginal cost (MC). If P > MC, resources should be allocated more to production; if P < MC, fewer resources should be allocated.
What is the free rider problem?
The free rider problem arises when public goods are non-excludable, meaning individuals can benefit without paying, leading to under-provision.
What are the characteristics of public goods?
Public goods are:
- Non-excludable: No one can be prevented from using them.
- Non-rival: One person’s consumption does not reduce availability for others.
- Non-rejectable: Individuals cannot opt out of consuming them (e.g., national defense).
What policies can address the under-provision of public goods?
- Government provision (funding via taxation)
- Government funding of private provision
- Voluntary donations
- Community-based solutions
Define negative externalities and provide examples.
Negative externalities occur when third parties suffer costs from production or consumption without compensation. Examples:
- Production: Pollution, deforestation
- Consumption: Smoking (passive smoking), alcohol abuse
How can negative externalities be reduced?
Through:
- Indirect taxes
- Pollution permits
- Regulations and bans
- Nudging policies
Define positive externalities and give examples.
Positive externalities occur when third parties gain benefits from production or consumption without compensation. Examples:
- Production: R&D, education
- Consumption: Vaccinations, public transport
How can positive externalities be encouraged?
Through:
- Subsidies
- Government provision
- Regulations and mandates
- Nudging policies
What are merit and demerit goods?
- Merit goods: Under-consumed goods with positive externalities (e.g., education, healthcare).
- Demerit goods: Over-consumed goods with negative externalities (e.g., tobacco, alcohol).
What are the main types of government intervention in markets?
- Indirect taxes
- Subsidies
- Regulations
- Price controls (max/min prices)
- Competition policies
- Redistribution policies
What is government failure?
Government failure occurs when intervention worsens resource allocation, causing inefficiencies and unintended consequences.
What are some causes of government failure?
- High compliance costs
- Unintended consequences
- Bureaucracy
- Regulatory capture
- Political self-interest
What is the Tragedy of the Commons?
Overuse and depletion of shared resources due to lack of ownership, e.g., overfishing, deforestation.
How can environmental market failure be addressed?
- Carbon taxes
- Tradable pollution permits
- Regulations and quotas
- Green subsidies
What is a maximum price? What are its consequences?
A legally set price ceiling below the market equilibrium to keep goods affordable. Consequences:
- Excess demand (shortages)
- Shadow markets
- Supplier exits
What is a minimum price? What are its consequences?
A legally set price floor above the market equilibrium to support producers or limit consumption. Consequences:
- Excess supply (surpluses)
- Higher costs for consumers
- Government spending on surplus
What is behavioral economics? How does it explain irrational behavior?
Behavioral economics studies psychological influences on economic decisions. Irrational behavior arises due to:
- Bounded rationality
- Bounded self-control
- Social norms
- Loss aversion
