market failure Flashcards
what is market efficiency
A situation where the demand for goods and services in the economy matches the supply of these goods and service without any surplus or shortage
What is market failure?
The inability of the market to allocate resources efficiently to best satisfy society’s wants. Which indicates that the quantity demanded of a product does not equal the quantity supplied.
What are the causes of market failure ?
The low provision of public goods and the under provision of merit goods.
What are some characteristics of public goods?
- It’s non-diminishing. Which means that the consumption of a public good by one individual does not reduce the amount available for another.
- Non- Rivalry. Which means when one person uses a good, it does not prevent someone else from using it.
How does the low provision of public goods cause market failure?
When there is a market for public goods yet no private firms are willing to supply the goods no one can be made to pay for it. Therefore this is said to be a “missing market”, causing market failure.
How does government intervention help solve low provision of public goods causing market failure?
The government supplies the public goods itself and are financed out of taxation revenue.
What are merit goods?
Merit goods are goods where the social benefits to the community of the consumption of the good outweighs the private benefits to the consumer. eg healthcare
How does the underprovision of merit goods cause market failure?
When society consumes less than the socially optimum quantity of merit goods and firms underproduce merit goods. Which leads to market failure.
How does government intervention solve the issue of the under provision of merit goods causing market failure?
The government steps in and provides these merit goods free of charge or at a subsidized price which encourages more consumption of said goods and the likelihood of market failure is reduced.
What are externalities ?
Externalities are spillover effects of production or consumption of goods which fall on a third party. It can either be negative or positive.
How does positive externalities cause market failure ?
Positive externalities are a form of market failure as in the operation of the market too little of the good is being produced due to the the price mechanism ignoring the external benefits.
How does government intervention solve the problem of positive externalities causing market failure?
The government encourages firms that produce positive externalities to produce more by giving grants. Which help to boost production and lower production costs.
formula for marginal social benefit [MSB] ?
Marginal private benefit + Marginal external benefit = Marginal social benefit
MPB + MEB = MSB
How does negative externalities cause market failure ?
In the operation of the market “too little of the good is being produced” and the cost falls on the third party and he/she is in no way compensated
How does government intervention solve the problem of negative externalities causing market failure ?
The government can discourage firms that produce negative externalities by imposing high taxes to reduce production of such goods or place direct control limiting the quantity produced of the good.
