Market Failure Flashcards
When does market failure occur
Market failure occurs when a market allocates resources inefficiently
Society suffers as a result
Government often tries to intervine to try and stop it
Describe complete market failure
No market exists I.e. ‘missing market’
E.g. national defence
No market which allocates national defence therefore gov needs to provide it
Describe partial market failure
Market functions but qty supplied of a good or service is wrong
If left to market forces:,
People unable to afford treatment they need -> government may intervine and provide free health care
What do externalities affect
Third parties
What are externalities
The effects that producing or consuming a good/service who aren’t involved in the making, buying/selling and consumption of good/service
What are externalities
The effects that producing or consuming a good/service who aren’t involved in the making, buying/selling and consumption of good/service
What are the two types of externalities
Positive or negative externalities
What are positive externalities
External benefits to a third party
Negative externalities
External costs to a third party
Why does market failure occur
Because externalities are being ignored
What is a private cost
The cost of doing something to either a consumer or a firm
What are external costs
Caused by externalities e.g. dropping litter
What are external costs
Caused by externalities e.g. dropping litter
Create an external cost to the council who then have to pay someone to clean it up
What is social cost
Full cost to society
Private costs + external costs = social costs
What is private benefit
Benefit gained by a consumer or firm by doing something
What is external benefit caused by
Caused by externalities
What is social benefit
Private benefit + social benefit
Full benefit received by society from pollution
What does ignoring negative consumption externalities lead to
It leads to overconsumption
What does ignoring positive production externalities lead to
Leads to underproduction
What does merit goods do to society
It benefits society
What do demerit goods do to society
Do the opposite to demerit goods
Merit goods have
Greater social benefits than private benefits
Consumption is beneficial to the individual and society
Demerit goods have
Greater social costs than private costs
Consumption is harmful to people and society
However people are usually unaware or don’t care
What does the market do to merit and demerit goods
Merit goods are over underprovided
Demerit goods are overprovided
What does ignoring negative production externalities lead to
Overproduction
What does ignoring positive production externalities lead to
Leads to underproduction
Ignoring negative consumption externalities leads to
Overconsumption
What does ignoring positive consumption externalities lead to
Underconsumption
Government can intervene In markets for merit and demerit goods
.
Why does government intervene in a market
Failure of the market to meet socially optimum levels
How can the government influence the market
Taxes
Subsides -> increase/decrease in consumption
What are the two characteristics of a public good
Non excludability - people cannot be stopped from consuming the good even though they haven’t paid for it
Non rivalry - one person benefitting from the good doesn’t stop others
Examples of a public good
Firework displays, lighthouses
What are private gooda
Excludable
People have a choice to consume
Most goods are private goods
What are non-pure (quasi) public goods
Public good, but not fully
E.g. roads
Public goods are underprovided in the free market
..
What is the free rider problem
Once a public good is provided, it is impossible to stop someone from benefitting from it, even if they haven’t paid
What cannot work if there are free riders
Price mechanism
Because instead people will wait for someone to pay
What happens when producers overvalue the benefits of a public good
Price goes up
What is it an example of something where no market exists for externalities
Example of missing market
Symmetric information
Everyone has equal and perfect knowledge
What does a competitive market have
Perfect information
What does symmetric information allow
It allows efficient allocation of resources
This situation is very rare however buyers don’t have time or resources to obtain full info on prices before buying
What is asymmetric information
Lack of perfect information in the market
Sellers have more info on product than buyers or vice versa
Information is imperfect
What does information failure cause
Market failure
What does imperfect information cause
Market failure
Underconsumption of merit goods - consumers may not know the benefit
Overconsumption of demerit goods - no info on how bad it is
Merit goods may be underprovided and demerit overprovided
Consumption by an individual depends on
Wealth and income
What is income
Amount of money received over a set period of time
What is wealth
Value in money of assets held
Money + wealth is not distributed equally in a market economy
..
How would government try to distribute income and wealth more equally
Government intervention
E.g. progressive taxes
What are the disadvantages of government trying to distribute wealth and income more equally
Removes incentive for individuals+firms to work hard -> market failure
Immobile factors of production (one that cannot be easily moved to another area of the economy)
E.g. Land, capital
However capital is mobile and immobile
Mobile labour
Able to move from one job to another
Occupational or geographical
Why would there be geographical immobility
Reluctance to leave family + friends
Dislike of change
Imperfect information for jobs
Large house price, rent, cost of living
Why would there be occupational immobility
Lack of training, education and skills
Lack of required qualifications
Lack of work experience
What do monopolies cause
They cause market failure and misallocation of resources
What do monopolies cause
Market failure and misallocation of resources
Draw a negative production externalities diagram
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Draw a positive production externalities diagram
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Draw a negative consumption externalities diagram
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Draw a positive consumption externalities diagram
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