Market And Government Failure Flashcards
What are the types of Market Failure?
- Asymmetrical information
- Information gaps
- Public goods
- Negative and positive externalities
- Equity (Fairness) issues
What are negative externalities?
A negative effect in a third party outside the externality
What are positive externalities?
A product which has a positive impact on the third party. The problem is that right now it’s under valued and under consumed.
What are subsidies?
Direct payments that governments provide businesses to offset operating costs
What are the examples of government intervention?
- Subsidies(food) and indirect tax(petrol)
- Minimum(alcohol) and maximum pricing (rent)
- Road pricing (driving)
- Provision of public goods
- Information gaps
- Pollution permits
What is government failure?
When the government attempts to correct market failure - and fail themselves.
What is asymmetric information?
This type of market failure exists when one party and uses that advantage to exploit the other party.
What are the government interventions aimed at closing the information gap?
Compulsory labelling on cigarettes packages, improved nutrition info on foods, industry standards etc.
What is market failure?
When the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss.
What is complete market failure?
Occurs when the market simply does not supply products at all - we see ‘missing markets’
What is partial market failure?
Occurs when the market does function but it produces either the wrong quantity of a product or at the wrong price (often leads to government intervention).
What three things are public goods?
Non excludability, non rival consumption and non rejectable.
What is a quasi public good?
A near public good
What is the free rider problem?
People benefitting from a good and not having to pay for it.
Why are pure public goods not provided by the private sector?
Because they would be unable to supply them for a profit
What is non excludability?
Public goods cannot be confined solely to those who have paid for it
What is non rival consumption?
Consumption by one consumer does not restrict consumption by other consumers
What is non rejectable?
Collective supply of public good for all means it cannot be rejected by people (e.g flood defences)
What is a merit good?
A commodity or service that is regarded by society/government as deserving public finance. The opposite is a demerit good. A merit good will be under consumed.
What is a demerit good?
Where consumption leads to a negative impact on the consumer and the society.
What are the benefits for increased government spending on public goods?
Economies of scale, access and affordability, state provision(to overcome market failure), public goods drive long run economic growth
What are the risks of increased government spending on public goods?
Absence of profit motive, links with corruption, wasteful spending could lead to government failure
