Market failure Flashcards
What is the meaning of market failure?
Occurs when the forces of supply and demand do not result in efficient allocation of resources.
What are the different types of market failure?
Externalities
Non provision of public goods
Information gaps
Monopoly
Moral hazard
Immobility of labour
Speculation and market bubbles
What are the reasons for market failure?
It is necessary for social marginal costs to be equal to social marginal benefits
Some costs and or benefits may not be included because they may not be known or difficult to quantify
Social marginal cost refers to the addition to total cost of producing an extra unit of output whereas social marginal benefit refers to the addition to total benefits of consuming an extra unit
What are externalities?
They are costs and benefits to third parties who are not directly part of a transaction between producers and consumers.
What are the two types of externalities?
External costs (negative externalities)
External benefits (positive externalities)
What are private costs?
They are the direct costs to producers and consumers for producing and consuming a product.
What is an example of a private cost for a producer?
Wages, rent, raw materials and energy
What is an example of a private cost for a consumer?
Price paid for product / service
What external costs?
They are the costs in excess of private costs that affect third parties who are not part of the transaction.
What are examples for external costs of production?
air pollution
noise pollution
pollution from destruction of rainforest
What are examples for external costs of consumption?
passive smoking
overeating by individuals
What are social costs?
Sum of private costs and extra costs.
What is the formula for social costs?
private costs + external costs
What are private benefits?
They are direct benefits to producers and consumers for producing and consuming product
What are examples for a private benefit to a producer?
Revenues received from the sale of the product / service
