Market Failure Flashcards
What is market failure?
When the market fails to allocate resources efficiently
What is complete market failure?
When no market exists, called a missing market
What is partial market failure?
When the market functions, but the price or the quantity supplied is wrong
What are externalities?
The effect of consuming or producing a good or service on third parties who aren’t directly involved in the transaction
What is private cost?
The cost of doing something to either a consumer or firm
What is external cost?
A cost that the company or firms doesn’t pick up
What is the equation for social costs?
Social costs = private cost + external cost
What is private benefit?
The benefit gained by a consumer or firm by doing something
What is external benefit?
A benefit that doesn’t only benefit the consumer or firm
What is the equation for social benefit?
Social benefit = Private benefit + external benefit
Why does market failure occur?
In a free market, the price mechanism will only take into account the private costs and benefits, but not the external costs and benefits
On a negative externalities in production diagram, where is the external cost?
The difference between marginal social cost and marginal private cost
On a positive externalities in consumption diagram, where is the external benefit?
The difference between marginal social benefit and marginal private benefit
What does a negative production externalities diagram look like?
MSC is higher than MPC, both are going in the supply direction, welfare loss pointing left
What does a negative consumption externalities diagram look like?
MPB is higher than MSB, both are going in the demand direction, welfare loss pointing left
What does a positive production externalities diagram look like?
MPC is higher than MSC, both are going in supply direction, welfare loss pointing right
What does a positive consumption externalities diagram look like?
MSB is higher than MPB, both are going demand direction, welfare loss pointing right
What is a property right?
A form of legal ownership of land
What is a merit good?
Goods whose consumption is regarded good for society
What is a demerit good?
Goods whose consumption is regarded as being harmful to society
What do merit goods generate?
Positive externalities, but are underproduced
What do demerit goods generate?
Negative externalities, but are overproduced
What is a public good?
Goods that are available to everyone
What are the characteristics of public goods?
They are non-rivalrous and non- excludable
What is non-excludability?
People cannot be stopped from using a good even if they haven’t paid for it
What is non-rivalrous?
One person benefitting from the good doesn’t stop others from benefitting from the good
What is a private good?
A good that is excludable and rivalrous
What is a quasi public good?
A good that has characteristics of public and private goods
What is the free rider problem?
When someone can still benefit from a good or service even if they haven’t paid for it. E.g. national defence
What is the tragedy of the commons?
The idea that people acting in their own interests will overuse a common resource, without considering that this will lead to a depletion or degrading of that resource
What is asymmetric information?
When one party involved in an economic transaction has more information than the other
What is imperfect information?
When economic agents don’t have all the information, or they have the wrong information.
What is an immobile factor of production?
A factor of production that cannot be easily moved to another area in the economy
What is occupational immobility?
When workers have difficulty moving from one industry to another
What is geographical immobility?
When workers are unable or unwilling to move areas to find work
