Market Failure Flashcards
What is market failure?
When the free market fails to provide an efficient allocation of resources
- free markets have no government intervention
What are the types of market failures?
- negative externalities in production —> (e.g. pollution), have costs either private of external and without gov intervention they would be over-produced
-positive externalities in production —> (e.g. beekeeping) have benefits either private or external and without gov intervention they would be under-produced - demerit goods —> (e.g. cigarettes) also have costs and would be overproduced
- merit goods —> (e.g. education) have benefits and would be underproduced
- public goods
- monopolies —> over charge, so underconsumption in goods and services and misallocation of resources since wants and needs aren’t met
- inequality —> inequitable distribution of income and wealth, which can lead to negative externalities (e.g. social unrest)
- immobility
What are public goods?
Public goods are missing from the free market, but offers benefits for society (e.g. a street light)
- non-excludable, so anyone can consumer it
There is a free rider problem, where people who did not contribute for paying for the good (e.g. taxes) receive the same benefits from it. This is why public goods are under provided in the private sector as there is no profit from it and consumers don’t see reason to pay if they still get the benefit if they don’t pay.
What are private goods?
They are rival and excludable (e.g. a chocolate bar). Private property rights can be used to prevent others from using it (e.g. a field)
What are quasi public goods?
A mix of public and private goods. Partially provided by the free market. Semi-excludable (e.g. tolls), lots of people can benefit as long as they have paid
- TV broadcasting is now excludable with subscriptions for those who pay
What are some features of the negative and positive externality curves?
- costs curves always slope upwards, benefit curves slope downwards
- NEs will always have the free market greater than socially optimal
- fm occurs when PC = PB and SO occurs when SC = SB
What is immobility?
The mobility of labour is the ability of workers to change between jobs
- unemployment is evidence that labour markets do not work efficiently. Frictional unemployment is when someone moving jobs or searching for a new one. Structural unemployment is when theres a decline in an industry - when workers don’t match location or skills for the job
What is geographical immobility?
Labour might not be able to travel due to family ties, etc
What is occupational immobility?
Labour can’t change their use, might not have transferable skills - lack of training, etc.
What is inequality in market failure?
Income - flow of money (e.g. wages)
Wealth - stock of assets (e.g. house, car, etc)
In absence of gov intervention, likely to result in unequal and inequitable distribution of income and wealth
What is symmetric information?
Means consumers and producers have perfect market info to make their decisions
What is asymmetric information?
Can lead to market failure. When there is unequal knowledge between consumers and producers (e.g. a car dealer knows a fault of the car the consumer is unaware of). Can be imperfect info, where knowledge is missing.
- this leads to a misallocation of resources, when consumers pay too much or too little, or firms might produce incorrect amounts
What is the tragedy of the commons?
And environmental market failure - Overconsumption which is damaging social welfare
- occurs when there is ‘common’ land or resources with no owner to protect them (e.g. international waters or the air)
What’s the theory of tragedy of the commons?
- e.g. common grazing land where people took cows to graze, but led to overgrazing and a loss of resource
—> in theory, individuals could limit their use so that they don’t deplete common resources, however everyone acts in their own self-interest, and relies on others to cut back their production - leading to overconsumption and resource depletion
What’s another example of tragedy of the commons?
Over-fishing —> incentives to catch as many fish as they can, yet if everyone did this then fish will deplete. No incentive to hold back because no one else will.
