Market Failure Flashcards
What does market failure mean?
Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market.
What does an externality mean?
The (positive/negative) third party effect due to the consumption or production within a market.
What is a private cost?
Private costs are the costs faced
by the producer or consumer
directly involved in a transaction.
What happens when a negative externality exists?
When negative externalities exist,
social costs exceed private cost.
This leads to over-production and
market failure if producers do not
take into account the externalities.
Give negative externality examples:
Air pollution production. …
Water pollution production. …
Farm production. …
Garden production. …
Traffic congestion consumption. …
Noise consumption. …
Secondhand smoke consumption. …
Strobe light consumption.
What happens when a positive externality exists?
When positive externalities occur,
social benefits exceed private
benefit – this can also lead to
market failure.
What does social cost equal to?
Social Cost = Private Cost +
External Cost.
What does social benefit equal to?
Social Benefit = Private benefit + External benefit.
What is a public good?
A good that is non-excludable and non-rivalrous in consumption
e.g street lightning.
What does non-rivalrous mean?
The consumption of the good
from one person does not
reduce the availability of the
good to others.
What does non-excludable mean?
The good can not be confined to
those who paid for it.
What is the free-rider problem?
The free rider problem is the burden on a shared resource that is created by its use or overuse by people who aren’t paying their fair share for it, or who aren’t paying anything at all.
What is asymmetric information?
Asymmetric information occurs when one party to an economic transaction possesses greater material knowledge than the other party.
What is a moral hazard?
Moral hazard occurs when insured
consumers are likely to take greater
risks, knowing that a claim will be paid
for by their cover.
What is adverse selection?
Health insurance: those most likely to purchase
health insurance are those who are most likely to
use it, i.e. smokers/drinkers/those with underlying
health issues
The insurance company knows this and so raises the
average price of insurance cover
This prices healthy consumers out of the market,
meaning that only high risk individuals gain
insurance – a market failure.
