Market failure Flashcards
Define market failure.
When there is a misallocation of resources in the free market.
What is the difference between complete market failure and partial market failure?
- Partial market failure is when the market does function but it produces either the wrong quantity or at the wrong price range
- Complete market failure is when firms are unable to allocate scarce resources to the satisfaction of a need or want
Define public goods.
Non-excludable and non-rival goods.
What are some examples of public goods?
- Lighthouse
- Fresh air
- Street light
- Flood defences
- Road signs
- Beaches
What does non-excludable mean?
No price can be changed for the good.
What does non-rival mean?
The quantity of good doesn’t diminish upon consumption.
Define private goods.
Excludable and rival goods.
Define quasi-public goods.
Have characteristics of both public and private goods.
What are some examples of quasi-public goods?
- Roads
- Tunnels
- Bridges
Define the free rider problem?
Where individuals have the incentive not to contribute anything at all to the public good, but wait for others to pay, to free ride off their contributions.
What are some examples of the free rider problem
- Sailors will benefit from the illumination of a lighthouse - somebody else has built the lighthouse
- Cleaning a common kitchen area
Define the tragedy of the commons.
Where there is an overconsumption of a particular good/service because rational individual decisions lead to to an outcome that is damaging to the overall social welfare.
Define common access resources. What are examples?
Natural resources over which no private ownership has been established. E.g., timber and pulp from forests, seafood and minerals from seas, oxygen from air.
Lack of private ownership leads to…
the tragedy of the commons.
