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Economics > Market failure > Flashcards

Market failure Flashcards

1
Q

Formula for positive externality of consumption

A

MPB < MSB

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2
Q

Solutions to positive externalities of consumption

A
  • subsidise firms
  • direct govt provision
  • positive advertisement
  • legislation
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3
Q

Problems with subsidizing firms (for positive externalities of consumption)

A
  • cost for govt (opportunity cost)
  • production inefficiencies because part of the producer’s revenue is guaranteed by the govt
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4
Q

Problems with direct govt provision (for positive externalities of consumption)

A
  • cost to govt (opportunity cost)
  • bad quality of good or service (the govt might be less efficient than the private firms that provide it)
  • private firms may be dissuaded from investing in the industry because the govt will provide for it anayway
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5
Q

problems with positive advertising (for positive externalities of consumption)

A

cost for govt might be high (opportunity cost)

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6
Q

problems with legislations (for positive externalities of consumption)

A
  • will only be successful if the govt provides the good/service free of charge
  • some people might see it as an infringement of their rights
  • there is additional cost in enforcing the law
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7
Q

formula for positive externality of production

A

MSC < MPC

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8
Q

solutions to positive externalities of production

A

direct govt provision, subsidies

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9
Q

problems with direct govt provision (for positive externalities of production)

A
  • opportunity cost for govt
  • govt might lack expertise found in firms
  • private firms may be dissuaded from investing in the industry
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10
Q

problems with subsidies

(as a method of correcting positive externalities of consumption)

A
  • difficult for govt to estimate the level of subsidy each firm deserves
  • opportunity cost for govt
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11
Q

formula for negative externality of consumption

A

MPB > MSB

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12
Q

solutions to negative externalities of consumption

A
  • banning or regulating the good
  • indirect tax
  • negative advertisement (education)
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13
Q

problems with banning or regulating the good

(as a solution for negative externalities of consumption)

A
  • negative effect on shareholders and unemployment
  • effect of govt revenue because it stops receiving taxes from that industry
  • negative reaction from consumers
  • additional costs of enforcing the law
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14
Q

problems with indirect taxes (for negative externality of consumption)

A
  • often taxed goods tend to be inelastic so consumption isn’t always decreased
  • black markets might appear
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15
Q

problems with negative advertisement / education (for negative externality of consumption)

A
  • opportunity cost for the govt
  • doubts about effectiveness
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16
Q

formula for negative production externality

A

MSC > MPC

17
Q

solutions for negative production externalities

A
  • taxes
  • legislations
  • tradeable emission permits
18
Q

problems with tradeable emission permits (for negative production externalities)

A
  • difficult to determine an acceptable level of pollution
  • difficult to measure a firm’s pollution
  • pollution is still present
19
Q

problems with legislations/regulations

(as a method of correcting negative production externalities)

A
  • unemployment
  • creates non-consumption of the good (though the good might be necessary for producers)
  • high cost in setting and enforcing the legislation
20
Q

problems with taxes

(as a method of correcting negative production externalities)

A
  • difficult to set a value on the externality
  • difficult to identify which firms are responsible for what levels of production
  • don’t actually stop the pollution from taking place
21
Q

characteristics of common pool resources

A

Rivalrous and non-excludable.

This means that the consumption of the good reduces its availability for others but it is impossible to exclude others from using it (i.e. finite but priced at 0)

22
Q

how does unsustainable production of common pool resources create negative externalities?

A

The lack of price means that the rationing function does not occur, leading to overuse

23
Q

solutions to the tragedy of the commons

A
  • Carbon taxes
  • Tradeable emission permits
  • Subsidizing cleaner substitute gods
  • Legislation
  • Collective self-governance
24
Q

characteristics of public goods

A

non-rivalrous and non-excludable.

This means that the consumption of the good does not reduce its availability for others and it is impossible to exclude others from using it.

25
Q

what is the free rider problem?

A

When people can enjoy a good without paying for it, it creates market failure as there is no incentive that incentivizes firms to produce the good.

26
Q

Forms of government intervention in response to public goods

A
  • free govt. provision
  • contracting out to the private sector
27
Q

asymmetric information

definition + types

A

When buyers and sellers do not have equal access to information.

Types:

  • Adverse selection: when one party (buyer or seller) has more information than the other party about the quality of the product being sold
  • Moral hazard: where one party takes a risk but does not bear all of the consequences of the risk
28
Q

government responses to adverse selection

A
  • regulation
  • provision of information
  • licensure
29
Q

private responses to adverse selection

A
  • screening: consumers seek more information by screening (researching) the product
  • signalling: the use of trusted measures of quality to signal the quality of the product (e.g. warratnies, brand names)
30
Q

free good vs economic good

A

Public good:

  • Is not scarce
  • Has 0 opportunity cost

Economic good:

  • Is scarce
  • Has an opportunity cost
31
Q

responses to moral hazard

A

Solutions seek to realign the incentives:

  • insurance
  • deductibles (out-of-pocket)

Economics (14 decks)

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