market failure Flashcards
sources, positive and negative externalities, non provision of public goods, imperfect market information, moral hazard, speculation and market bubbles
why does market failure occur
too much or too little production or consumption compared to socially optimal level of output
sources of market failure (5) ENIMS
externalities
non provision of public goods (free rider problem)
imperfect market information
moral hazard
speculation and market bubbles
non-core sources of market failure (2) MF
monopolies and oligopolies
factor immobilities
what is the role of markets
allocate scarce resources
types of market failure 2
- production of too many or too little goods (partial market failure)
- missing markets (complete market failure)
how do producers and consumers measure private benefits
Measured by the satisfaction a consumer receives from a good or service, or the profit a producer earns from selling it.
Private sector vs. their concerns on Social Costs & Benefits
Private sector concern only private cost and private benefits, they do not take into
account of external cost and external benefits
what is the result of private sector mainly caring about private benefit (2)
goods with social benefits can be under-provided due to ignored benefits
goods with social costs can be over-provided due to ignored costs
what does the demand curve represent in market failure diagrams
Marginal private benefit (additional benefit from one more unit of
consumption)
what does the supply curve represent in market failure diagrams
Marginal private cost (additional cost from one more unit of
production)
difference between welfare loss and dead-weight loss
deadweight loss is a specific type of welfare loss, its a cause of welfare loss. welfare loss is the overall decrease in social well-being, deadweight loss is the overall decrease in social well being DUE TO market inefficiencies
causes of welfare loss (4)
Deadweight loss (market inefficiencies)
Externalities (unpriced costs or benefits)
Income inequality
Changes in quality of goods and services
what does “MPC>MSC, assumed MB = MPB = MSB” indicate
indicates a situation where private production decisions might not align with the best outcome for society. helps policy-makers.
why are goods with external costs overconsumed
the private costs are considered by producers and not the external costs, firms will over-produce as they consider a cheaper cost of production
use of marginal analysis
the difference btwn social cost and social benefit changes as the level of output changes, this can be shown
why are public goods under-provided (2)
- Private sector does not want to provide public goods because they cannot make
profit as public goods are non excludable. - Due to their non-excludable naturepeople wouldn’t be incentivized to pay if they could enjoy them for free, free rider problem occurs
tragedy of the commons
occurs when common pool resources are used in production in an unsustainable way, creating negative externalities and harming society no incentive for firms to reduce production levels as they seek to maximise profits.
how does tragedy of the commons cause partial market failure
external costs like pollution prevents future generations from benefiting in the same way
solution to free rider problem (2)
1) Government directly provides public goods and everyone contributes through taxes
2) Changing from pure public goods to non pure public goods.
causes of information failure (4)
Asymmetric information
Hidden information
Adverse selection
Moral hazard
what is adverse selection in terms of information failure
(when buyers or sellers disproportionately consume a product due to hidden information) like sick people are morel likely to look for health insurance, generating costs for producers
The significance of information gaps.
information failure
consequences of principle agent problem (3)
- moral hazard / misrepresentation
- Shirking
- over-consumption (agent might use the principal’s resources)
Consequences of Moral Hazard (2)
- increased cost for principle
- reduced efficiency
