Market Failure Flashcards

1
Q

Define Market Failure

A

When the price mechanism leads to a misallocation of resources

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2
Q

Name and explain the different types of market failure
(give definitions where necessary)

A

1.Externalities:
-the external costs/benefits a third party receives from an economic transaction, outside of the market mechanism
-could lead to over/under production/consumption

2.Underprovision of Public goods:
-due to the nature of public goods, there are not profitable to supply in the free market due to the free-rider problem

3.Information Gaps:
-consumers may not fully understand the full benefits/costs when buying products
-Producers may not know the full benefit/costs when producing
–could lead to over/under production/consumption

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3
Q

Name and define the 2 features of public goods

A

Non-rival: one person’s use of the good doesn’t reduce its availability for others

Non-excludable: you can’t prevent someone from using the good

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4
Q

What is the free-rider problem

A

When individuals experience the benefit of a good/service without actually paying for it

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5
Q

What is the equation linking
Marginal Private costs
Marginal Social costs
Marginal External costs

A

Social costs=private cost+ external costs

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6
Q

Go on sketchpad to show negative externalities in production
AND
Positive in Consumption

A

Did you remember:
1.Inwards shift of MPC to MSC
2.Make sure that MSC is not parallel to MPC
3.Use arrows to show shifts in equilibrium, price and curves
4.Show overproduction/underconsumption
5.Deadweight welfare gain, points to socially optimum equilibrium
6. Point to the socially optimum equilibrium

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7
Q

What asymmetric information

A

When one party has superior knowledge compared to
another.

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8
Q

Give examples of asymmetric information where:
Seller has more info than buyer
Buyer has more info than seller
(Note: there’s a factor that can apply for both scenarios)

A

Seller has more info than buyer:
-Second hand market (condition of the product)
-loans/mortgages (hidden fees)
-labour market (true productivity of individual)

Buyer has more info than seller:
-loans/mortgages (ability to repay)
-online marketplaces (knowledge of alternatives)

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9
Q

What is the principal-agent problem

A

The principal-agent problem arises when there is a conflict of interest between a principal (the person or entity who delegates authority or responsibility) and an agent (the person or entity who is hired or contracted to perform tasks on behalf of the principal).

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10
Q

What is moral hazard

A

When one party is able to take risks or behave in a way that is detrimental to another party because they do not bear the full consequences of their actions.

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