Externalities and Market failure Flashcards
What are the types of market failure?
Externalities, information gaps , under provision of goods and services
What is market failure?
a situation defined by an inefficient distribution of goods and services in the free market.
What is a non-excludable good?
products that cannot exclude a certain individual or group of individuals from using them
What is a non-rivalrous good?
Non-rivalrous goods are public goods that are consumed by people but whose supply is not affected by people’s consumption
What is a non-rejectable good?
once a public good is supplied it cannot be rejected by beneficiaries
What is the difference between a non excludable good and a non rejectable good?
non-rejectable goods are consumed by everyone , regardless of their choice, non-excludable cannot exclude someone from using the good ,however people can choose to use it or not
What is asymmetric information?
when one party in a transaction possesses more information than the other
What is morale hazard?
A moral hazard occurs when one party engages in risky behaviour or makes decisions that benefit them while they do not bear the full consequences of that risk.
What are the characteristics of a public goods?
non-excludable, non-rival, non-rejectable
What is the principal agent problem?
goals of principals and managers are different
What is adverse selection?
people taking out insurance often being at highest risk
What are the advantages of carbon taxes?
make the polluter pay incentivises to reduce carbon, revenue generated
What are the disadvantages of carbon taxes?
Carbon inelastic may have little effect , hard to enforce
What are maximum prices and why are they set?
To prevent the market price from reaching a certain level./ Set below market equilibrium
What are minimum prices and why are they set?
Set above the equilibrium, ban on sales of goods below the minimum price.
What are the negatives of maximum pricing?
Excess demand may lead to shortages, suppliers may leave the market
What are the positives of minimum pricing?
Reduces consumption of goods with negative externalities, minimum wage
What are the negatives of minimum pricing?
Reduction in producer surplus, reduction in dynamic efficiency due to low SNP, depends on elasticity of goods, affects low income individuals. Potential of excess supply
What are the positives of maximum pricing?
Increased affordability, increased consumer surplus, welfare gain, prevents consumer exploitation
What are the negatives of maximum pricing?
Shortage may be created due to excess demand , suppliers may leave the market
What are the reasons that governments may intervene in markets?
Correct market failures, promote welfare gain, regulate markets/ provision of public goods
When does market failure occur?
Market failure happens when the price mechanism fails to efficiently allocate the scarce resources to where they are best suited.
What is a price mechanism?
The ways in which prices are determined
What are the benefits of tradable pollution permits?
This system can put a cap on the level of pollution.
The lower the pollution of a firm, the more they can benefit. This encourages firms to lower their pollution levels.
Governments make revenue.
What are the negatives of tradable pollution permits?
There is a cost to implementing the scheme.
Deciding on the level of pollution is difficult.
The market for permits is subject to failure also.
