Market Failure Flashcards
Market failure
When the market fails to allocate scare resources efficiently, causing a loss in social welfare
Types of market failure
- Externalities: a cost or benefit a third party receives from an economic transaction outside of the price mechanism
- Under-provision of public goods: non-rivalry and non-excludable. Are underprovided by the public sector du to the free rider problem
- Information gaps: economic agents do not always make rational decisions and so resources are not allocated to maximise welfare
Private costs/benefits
Costs/benefits for the individual. Q
Social costs
Costs/benefits to society as a whole. Private+external costs
External costs/benefits
costs/benefits to a third arty not involved in the economic activity
Merit/demerit good
a good with external benefits/costs, where the benefit to society is greater than the individual
- are usually underprovided by the free market
Government intervention
- indirect taxes and subsidies
- tradable pollution permits: allow firms to produce up to a certain amount of pollution, can be traded amongst firms
- provision of the good: healthcare
- provision of information: negative externalities are associated with information gaps
- regulation: could limit the consumption of goods e.g. banning the advertising of smoking
Public goods
- non rivalry and non excludable
Free rider problem
You cannot charge an individual a price for the provision of a non-excludable good because someone else will gain the benefit without paying for it
Private sector producers will not provide public goods to people because they cannot make sure of making a profit
Tradable pollution permits
- when the government gives firms a permit which allows them to produce up to set amount of carbon each year.
- they can sell excess permits or buy more from other firms.
- the limit on the number of firms means they can limit the amount of emissions
