Market Failure Flashcards
Market Failure
When the price mechanism fails to allocate scarce resources efficiently or when the operation of free-market forces lead to a net social welfare loss
Negative externalities
Costs to third parties and bystanders as a result of the action of producers or consumers, like air pollution, deforestation, smoking, excessive alcohol
Positive externalities
Benefits to third parties and bystanders as a result of the actions of producers and consumers, like healthcare, education, research and development
Merit Goods
Goods deemed more beneficial to consumers than they realise from imperfect information causing positive externalities in consumption. Examples could be education, healthcare, exercise
De-merit Goods
Goods deemed more harmful to consumers than they realise due to imperfect information causing negative externalities in consumption. Example could be cigarettes, alcohol, gambling
Externalities in relation to the market
They lie outside the initial market transaction and (without state intervention) they are not reflected in the market price
Private Costs
Internal costs faced by the producer or consumer directly involved in a transaction
External costs
When the activity of one agent has a negative effect on the well-being of a third party
Public goods
Non-excludable, Non-rival, Non-rejectable. Not normally provided by the private sector as no profit would be produced and no efficient way to price.
Non-excludable public goods
Benefits derived from a pure public good cannot be confined solely to those who’ve paid for it. Non-payers enjoy the benefits at no financial cost- ‘free rider problem’
Non-rival public goods
Each individual benefit of the good/service does not diminish other benefits, the marginal cost of supplying a public good to an extra person is zero. If supplied to one person, it is available to all
Non-rejectable public goods
The collective supply of a pure public good for all means that it cannot be rejected by people, like sunshine or the national nuclear defence system
Private goods
Owners can exercise private property rights, preventing others from using the good or consuming its benefits. A pure private good is excludable and rival
Quasi-public goods
A good which isn’t fully non-rival and/or is possible to exclude people from consuming the product, however it is difficult or costly.
Free rider problem
Someone who benefits without paying as a result of non-excludability. Customers who choose not to pay for a good, preferring others to contribute to the provision of a public good and ‘free ride’ of those contributions. As a result the incentive to provide the good disappears leading to market failure and causing social inefficiency
