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
