Market failure Flashcards
What is market failure and why might the government intervene?
Where markets fail to allocate resources effectively - gov intervene to improve fairness, social and economic outcomes.
What are the 4 reasons for market failure?
Information failure, market power, under provision of public goods and externalitites.
Why does information failure exist?
Consumers may not have enough information on a product, advertising may be misleading, there may be failure to disclose information, moral hazard, asymetric information, framing and bias issues, myopia
What is an externality?
A cost or benefit of an economic transaction to a third party.
How can taxation be used to decrease externalitites?
A tax set equal to the marginal external cost (externality) means that MPC=MSC so the firm pays for the entirety of costs of production at the optimal output.
What is a merit good and how might the government react if it is underporvided?
A good whereby the social benefit is greater than the private benefit - gov may subsidise to raise production to optimal point.
What is market power?
Where firms have a high percentage of the market so can set P>MC creating inefficiencies and DWL.
How can the gov limit market power?
Using regulation and competition policy such as limiting mergers and takeovers, preventing collusion, increasing competition.
What is a public good? Why are they not provided in the market?Give an example?
A good whereby the social benefit > social cost. Not provided in the market because the private benefit < private cost and They are non excludable so anyone can use them creating a free riding issue and non rival whereby one persons consumption of the product doesnt diminish it for someone else e.g street lights, traffic lights, national defence, clean air.
Why does government failure exist?
Lack of information
Unintended consequences
Regulatory capture / rent seeking behaviour (major businesses can influence gov decisions)
Gov may not implement policies that max social welfare if it doesnt max their welfare e.g corruption (public funding used for their good)
Bureaucrats may not have the incentive to regulate and monitor implementation of the policy.
