Market failure Flashcards
What is market failure
When a market fails to allocate resources efficiently which causes a social welfare loss
What a the 3 types of market failure
Externalities
Under provision of public goods
Information gaps
Define externalities
The effects good or bad felt by a 3rd party due to an economic transaction
What problem is caused by Negative production externalities
There is overproduction of demerit goods:
May cause environmental issues or health issues
Occurs when MPC greater than MSC
What occurs in positive consumption externalities
Their is an underproduction of merit goods:
These goods may help society like healthcare
What methods can the government use to reduce/provide externalities
Indirect tax and subsidies
Tradeable pollution permits
Provision of goods
Provision of information
Regulation
What are public goods
Goods that bring benefits to society
Non-rivalrous (one use does not deter other people from using)
Non-excludable (you cannot stop someone from accessing the good)
What is the free rider problem
The reason firms do not provide public goods is because you cannot charge an individual the price of using a good so the good is provided by the government.
what is a public
A public good, all goods that all non-rivalrous and non-excludable and is under provided in the private sector
What is a merit good
A good with external benefits
