Market Failure Flashcards
Incentive function
Rising prices encourage firms to expand their level of output because of higher profits
Signalling function
If the price of a good changes, this signals to the consumer or producer that they should change their level of consumption or production
Rationing function
Resources are scarce. The price of a good rations that good. This limits supply to those who are willing and able to pay for it
Market failure
When the price mechanism leads to a misallocation of resources
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
Non rivalry
If one person consumes a good this doesn’t stop another person from consuming it
Non excludable
Someone not paying for a good doesn’t affect their ability to consume it
Quasi public goods
A public good can start to have private characteristics and become quasi-public
Free rider problem
It is impossible to exclude the benefits of a public hood from someone. As a result, people that don’t pay for the product will receive the same benefits as those that do. This disincentives people from producing a good in the free market because of the free riders who receive the benefit without paying. This is a market failure
Merit good
Good with positive consumption externalities
Demerit goods
Goods with a negative consumption externality
Deadweight welfare loss
The loss in utility due to externalities
negative consumption externalities
A cost to a third party outside the price mechanism as a result of consumption of a good
Negative production externalities
A cost to a third party outside the price mechanism as a result of production of a good
social cost
the cost to everyone in society - the sum of private costs and external costs
negative externalities
costs which affect third parties outside the price mechanism
positive externalities
benefits which affect parties outside the price mechanism
Monopoly power
The power a firm has to set prices - they are a price maker
equal distribution of wealth
when everyone has the same amount of wealth
equitable distribution of wealth
when everyone has an amount of wealth which is fair
