Market Failure 1.3 Flashcards
How does Market failure occour
Market failure happens when the price mechanism fails to efficiently allocate the scarce resources to where they are best suited
What is the difference between complete and partial market failure
Complete market failure happens where, unless the good or service is provided outside the mechanism, there wouldn’t be a market for it.
Partial market failure happens when the private sector may partially provide it but at the wrong price or quantity.
How does externalities cause market failure
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
This leads to the over or under-production of goods, meaning resources aren’t allocated efficiently
How does public goods cause market failure
Public goods are non-rivalry and non-excludable, meaning they are underprovided by the private sector due to the free-rider problem.
The market is unable to ensure enough of these goods are provided
How does asymmetric information cause market failure
Asymmetric information causes market failure because one party in a transaction has more or better knowledge than the other, leading to poor decision-making and inefficient markets. This imbalance can result in buyers overpaying or avoiding purchases altogether, while sellers may struggle to find willing customers.
What are private Costs/Benefits
The costs/benefits to the individual participating in the economic
activity.
The demand curve represents private benefits and the supply curve represents
private costs
What are the external costs/benefits
The costs/benefits to a third party not involved in the economic
activity.
They are the difference between private costs/benefits and social costs/benefits.
What are the social costs/benefits
The costs/benefits of the activity to society as a whole.
Negative production externality diagram
Paper*
Positive consumption externalities diagram
Paper*
5 Ways the government can intervene to ensure the market considers the external costs and benefits
-Indirect taxes and subsidies
-Tradeable pollution permits
-Provision of the good
-Provision of info
-Regulation
What are the 2 key characteristics of a public good
Non rivalrous
Non excludable
What does non rivalrous and non excludable mean
Non rivalrous - one person’s use of the good doesn’t stop someone else from using it
Non excludable - u cannot stop someone from
accessing the good and someone cannot chose not to access the good
why doesnt the free market provide public goods
They cannot charge an individual a price for the provision of a
non-excludable good because someone else will gain the benefit from it without paying anything
What is a free rider
Someone who receives the benefits without paying
for it
What is symmetric information
Where buyers and sellers have potential access to the same information; this is perfect information
What is asymmetric information
When one party has superior knowledge compared to
another. Usually, the seller has more information than the buyer and this means they can take advantage of the other party’s lack of knowledge, by charging them a higher price
How does information gaps lead to market failure
People do not buy things that maximise their welfare. It means that consumer demand for a good or producer supply of a good may be too high or too low, and thus price and quantity are not at the social optimum position
