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?
The gap between the MPC and MSC reflects the external benefit to society
What does a positive consumption externalities diagram look like?
The external benefit is shown as the area between the PMB and SMB, indicating the additional benefit to society from increased consumption
What is a property right?
The legal authority or entitlement that an individual or entity has over the use
What is a merit good?
A good that’s considered beneficial for individuals and society, but which tends to be under-consumed in a free market due to lack of information or awareness about its full benefits
What is a demerit good?
A good that’s considered harmful to individuals and society, often leading to overconsumption when people are unaware of or ignore the negative effects
What do merit goods generate?
Positive externalities
What do demerit goods generate?
Negative externalities
What is a public good?
A good that is non-excludable and non-rivalrous
What are the characteristics of public goods?
Non-excludability
Non-rivalry
Free rider problem
Provided collectively
What is non-excludability?
It’s impossible, or very costly, to exclude individuals from accessing or benefiting from a good or service once they are provided
What is non-rivalrous?
One person’s consumption does not reduce the availability of the good for others
What is a private good?
A good that is both excludable and rivalrous, meaning individuals can be prevented from using it, and one person’s consumption reduces the quantity available for others
What is a quasi public good?
A good that has characteristics of both public goods and private goods
What is the free rider problem?
Occurs when individuals benefit from a good or service without paying for it, relying on others to bear the cost. This leads to market failure as firms lack the incentive to provide the good
What is the tragedy of the commons?
When individuals, acting in their self-interest, overuse and deplete a shared resource, leading to its degradation or exhaustion
What is asymmetric information?
When one party in a transaction has more or better information than the other, leading to an imbalance in decision-making
What is imperfect information?
When participants in a market do not have access to complete, accurate, or reliable information to make informed decisions
What is an immobile factor of production?
A resource that cannot easily be relocated or reallocated to a different use or geographic location
What is occupational immobility?
When workers are unable to move from one job or industry to another due to a lack of skills, qualifications, or experience needed for new roles
What is geographical immobility?
When workers are unable or unwilling to move from one location to another in search of better job opportunities, often due to financial, social, or personal constraints
