Market Failure Flashcards
What is the economic problem?
How do we satisfy unlimited needs and wants with finite resources
Markets operate based on…
Markets operate based on the principle of maximisation.
What do producers want to maximise?
Profit
What do consumers want to maximise?
Utility
What do governments want to maximise?
Welfare
Market Failure definition
Market outcomes lead to a misallocation of resources
What is a misallocation of resources?
Where resources are not used to maximise society’s welfare
What are the two types of market failure?
• Complete market failure
• Partial market failure
Complete Market Failure definition
There is no market available for a good which society regards as desirable
Complete market failure results in…
Complete market failure results in missing markets
Partial Market Failure definition
A market is available but the market output and price is not optimal for society’s welfare
Partial market failure means…
Partial market failure means too much/little of a good is being produced and consumed.
Monopolists seek to…
Monopolists seek to increase prices by restricting output
What are private goods two characteristics?
• Excludability
• Rivalry
What is excludability?
The owners of a good have property rights which allows them to prevent others consuming their good
What is rivalry?
Consumption of a good reduces the mount of the good that others can consume
What two characteristics do public goods have?
• Non-excludability
• Non-rivalry
What is Non-Excludability?
It is difficult or impossible to prevent others from consuming a good
What is Non-Rivalry?
Consumption of a good has little or no effect on the amount left for others to consume
Example of a private good?
Pizza
Example of a public good?
Lighthouse
What affects the provision of public goods?
The market provision of public goods is often prevented by free-riders
What are Non-pure public goods?
Non-pure public goods have some but not all of the characteristics of a public good.
e.g Excludable but non-rival
What is the solution to the complete market failure caused by public goods?
State Provision
e.g Government pays for army & roads
What are internal costs/benefits?
The costs / benefits incurred / gained by the economic agent for producing or consuming a product.
Private costs = ?
Private costs = Internal costs
Private benefits = ?
Private benefits = Internal benefits
Whether consuming or producing a product is good for an agent will depend on what?
Whether consuming or producing a product is good for an agent will depend on whether the private benefits are larger than the private costs.
What are external costs/benefits?
The costs / benefits incurred / gained by other economic agents in society for producing or consuming a product.
Social costs = ?
Social costs = Internal costs + External costs
Social benefits = ?
Social benefits = Internal benefits + External benefits
Whether consuming or producing a product for society will depend on what?
Whether consuming or producing a product for society will depend on whether the social benefits are larger than the social costs.
Individual decisions are…
Individual decisions are based on private costs and benefits
Social welfare is maximised by…
Social welfare is maximised by weighing up social costs and benefits
What are externalities?
External costs and benefits affect society but are not considered by the decision maker
What is a MERIT GOOD?
A good which is under provided by a market
What is a DEMERIT GOOD?
A good which is over provided by a market
Why might foods be over or under provided?
• Externalties
• Imperfect Information
What is value judgment?
A decision on an issue which has to be based on option as there is no correct answer.
What is ‘THE MARGIN’?
The margin is a concept which refers to the next unit or item.
It considers what would happen if the variable increased or decreased by one unit
