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ESS > Economics Market Failure: Externalities and Common pool resources and Public goods > Flashcards

Economics Market Failure: Externalities and Common pool resources and Public goods Flashcards

1
Q

Market Failure

A

Any situation when the price mechanism allocates scarce resources in an inefficient way, leading to a loss in economic welfare

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2
Q

Outcome of market failures

A
  1. Underprovision
  2. Overprovision
  3. Underconsumption
  4. Overconsumption
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3
Q

When do market failure occurs?

A

When there is a divergence between private costs & benefits and the social costs & benefits of production/consumption

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4
Q

Private benefits

A

The gains of production and consumption enjoyed by an individual firm or person

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5
Q

Private costs

A

Production and consumption are expenses incurred by individual firm or person

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6
Q

Social benefits

A

The total benefits of consumption or production to society

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7
Q

Social benefits formula

A

Private benefits + Positive externalities

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8
Q

Social costs

A

The total costs of consumption or production to society

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9
Q

Social costs formula

A

Private costs + Negative externalities

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10
Q

Social optimal output

A

When marginal social benefits euqals marginal social costs

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11
Q

Allocative efficiency

A

Achieved when social or community surplus is maximized

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12
Q

Marginal private benefits (MPB)

A

Additional value enjoyed by households or firms from consuming or producing an additional unit of output

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13
Q

Marginal private costs (MPC)

A

Additional expenses spent by households or firms for the consumption or production of an additional unit of output

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14
Q

Marginal Social benefit (MSB)

A

Total gains to society from an additional unit of production or consumption of a good or service

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15
Q

Marginal social cost (MSC)

A

Total expenses to society from an additional unit of production or consumption of a good or service

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16
Q

Community surplus

A

The sum of consumer and producer surplus at a given market price (the total benefit)

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17
Q

Positive externalities

A

Benefits enjoyed by a third party from an economic transaction

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18
Q

Externalities

A

An external costs or benefits of an economic transaction that is caused by when the market fail to achieve the social optimal output of production or consumption

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19
Q

Merit goods

A

Products with positive externalities when it is consumed or produced

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20
Q

Merit goods characteristics

A

Rivalrous and Excludable

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21
Q

Rivalrous

A

The consumption of that good/service reduce the amount available to others at that point in time

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22
Q

Excludable

A

Suppliers can prevent non payers from benefiting from the good/service

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23
Q

Positive externalities of production

A

MSC<MPC (When suppliers pay more than society)

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24
Q

Positive externalities of consumption

A

MPB<MSB (When society benefit more than individuals)

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25
Negative externalities
Expenses incurred by third parties in an economic transaction for which no compensation is paid
26
Demerit goods
Products that create negative externalities to the third parties
27
Characteristics of demerit goods
Overprovision and overconsumption
28
Negative externalities of production
MPC
29
Negative externalities of consumption
MSB
30
Common pool resources
Resources that are rivalrous but not excludable, meaning it is not owned by many private individual or firms and have no price
31
Non excludable
Not possible to prevent those who are unwilling or unable to pay from benefitting from the product
32
Rivalrous
Usage of the product reduce the amount available for others to consume
33
Tragedy of commons
The degradation, depletion or destruction of a a common pool resource caused by rivalry or overuse
34
Government intervention
1. Indirect taxes 2. Legislation and regulations 3. Education 4. Tradable permits 5. International Agreements 6. Collective self-governance 7. Subsidies 8. Government provision 9. Carbon taxes
35
Indirect taxes
To increase price and reduce the quantity demanded/supplied to reduce overall welfare loss
36
Pros of indirect taxes
1. Reduce external costs of consumption and production 2. Raises government revenue 3. More efficient allocation of resources
37
Cons of indirect taxes
1. Ineffective due to PED being inelastic 2. Creation of black markets 3. Producers forced to layoff workers
38
Carbon taxes
Tax on producers who emit greenhouse gases
39
Pros of carbon taxes
1. Reduce the supply of products that are harmful to the environment 2. Reduce the external cost of fossil fuel production 3. Encourage firms to invest in green energy and technologies 4. Tax revenue
40
External Cost
When social costs is greater than private costs
41
Cons of carbon taxes
1. Ineffective because it is PED inelastic 2. Drive businesses out of business 3. Layoff of workers
42
Subsidies
To encourage production and consumption of merit goods
43
Government intervention for demerit goods
1. Indirect taxes 2. Carbon taxes 3. Legislation & Regulations 4. Educations 5. International agreements 6. Permits 7. Collective self governance
44
Government intervention for merit goods
1. Subsidies 2. Educations 3. Government provision 4. Collective self governance
45
Pros of subsidies
1. Can be targeted to specific industries 2. Lower price and increase demand 3. Can help firms to compete internationally
46
Cons of subsidies
1. Distorts allocation of resources due to excess in supply 2. Opportunity cost + Costly 3. Disincentivise firms
47
Legislation & Regulations
Governments create laws to limit the harm caused by the external costs of consumption or production
48
Pros of Legislation & Regulations
1. Can target specific industries 2. Government revenue 3. Reduce external costs
49
Cons of Legislation & Regulations
1. Costly 2. Difficult to determine who is breaking the law 3. Black markets 4. Dissatisfaction from firms and people
50
Education
Raising awareness of the external benefits or costs associated with the consumption of a good/service is an effective long-term method of changing consumer behaviour
51
Pros of education
1. Less expensive to implement 2. Positive cultural change 3. Economic improvement in long term
52
Cons of education
1. Takes a long time 2. Opportunity cost + Costly 3. Difficult to change behavior
53
Tradable Pollution Permits
A legal permit that only allow firm or specific area to produce a specific amount of pollution
54
Cons of Tradable Pollution Permits
1. Difficult to calculate the level of CO2 emissions 2. Too many permits make it ineffective 3. Doesn't stop pollution 4. Inelastic -> ineffective 5. Can cause higher price for consumers 6. Difficult for firms to follow
55
International Agreement
A collective agreement from different nations to solve common resources pool, environmental and demerit goods issues
56
Pros of International Agreement
1. Reduce overall welfare loss 2. Hold other nations accountable 3. Interdependencies and cooperations between nations
57
Cons of International Agreement
1. More pressure on low-income countries 2. No legal consequences 3. Political parties can withdraw or change the agreements
58
Collective self governance
Stakeholders in a community work together to combat the negative externalities of production usually associated with common pool resources
59
Pros of Collective self governance
1. Build community 2. Know the community best and act in the best interest of the community 3. Employment opportunities 4. Welfare loss reduction
60
Cons of Collective self governance
1. Disagreement 2. Works only when private property ownership rights are given the community 3. Imbalance in power
61
Government provision
When the government directly provide the goods and services
62
Pros of Government provision
1. Provide free products 2. Accessible for all regardless of income 3. Provide both private and external benefits
63
Cons of Government provision
1. Costly + opportunity costs 2. Excess demand 3. Disagreement from taxpayers
64
Public goods
Goods that are beneficial to society that are not provided by private firms due to the principles of non-excludability and non-rivalry
65
Private goods
Goods which firms are able to provide to generate profits that are excludable and can be rivalrous
66
Non-excludability
Inability of private firms to exclude certain customers from using their products
67
Non-rivalry
The inability of the product to be used up
68
Free rider problem
When people have access to a good or service without paying causing it to be underprovided in the free market
69
Problems of free riders
1. Under consumption/production 2. Over consumption or exploitation 3. Do not consider the external costs
70
Government intervention of public goods
Direct provision
71
Pros of Government intervention of public goods
1. Not available if the government doesn't provide 2. Benefit from the economies of scale 3. Promote public wellbeing
72
Cons of Government intervention of public goods
1. Costly 2. Opportunity cost 3. Potential failure
73
Contracting out
Paying a third party firm with expertise to provide the public good

ESS (3 decks)

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