MARKET FAILURE Flashcards
what is market failure
when resources are misallocated within a free market
why can market failure happen
- externalities
- the under-provision of public goods
- information gaps
what are public goods
a good where the consumption by one individual, does not effect another individuals consumption whether they like it or not
what are private goods
a good where consumption by one individual may result in the good not being available to another individual
what is a non rivalrous good
a good that consumers don’t have to compete to access
what is a non-excludable good
a good that once supplied to one individual, no-one can be excluded from its consumption
what is the free rider problem
when an individual or organisation receive the benefits of public goods that others have paid for without making any contributions themselves
what is needed for information gaps
imperfect or asymmetric information
what is imperfect information
where buyers or sellers both lack information to make an informed decision
what is Asymmetric information
where buyers and sellers have differing amounts of information, with one group having more than another (e.g mechanics)
what is an externality
A form of market failure. It results in third party effects that aren’t taken into account by the market mechanism
what is private cost
is the cost of an activity to an individual economic agent, such as a consumer or a firm
what is social cost
is the cost of an activity not just to the individual economic unit which creates the cost, but to the rest of society as well
what is an external cost
negative third party effects and represent costs outside of the market mechanism
what is a private benefit
the benefit of an activity to an individual economic agent, such as a consumer or a firm
what is social benefit
the benefit of an activity not just the individual economic agent which creates the cost, but to the rest of society as well
what are external benefits
are positive third party effects which represent benefits outside the market mechanism
what are social costs the addition of
private+external
how does the government intervene in market failure
- through ad valorem tax
- through a unit tax
how do government correct positive externalities
- subsidies
-minimum and maximum prices
-direct provision
what are Tradable pollution permits
can help enforce polluters to internalise their externality by introducing an extra cost linked to the level of pollution they can create
- the government sells the permits
- permits are traded between firms
- the high polluters need to spend
more on permits - low polluters sell permits receiving
revenue
Advantages to pollution permits
- governments make revenue
- firms have incentives to invest in
cleaner technology - carbon emissions reduced
- internalises the external cost
- less polluting firms have greater
revenues to invest in improving the
environment
disadvantages to pollution permits
- if there are too many permits then
there will no incentive to reduce
emissions - Increased production costs
->reduced competitiveness - higher consumer prices
- does this work on a global scale?
- government costs to monitor the schemes
what are merit goods
goods that are under-provided by the market mechanism
what are demerit goods
goods that are over-provided by the market mechanism
