Market Failure Flashcards
What is market failure
When the free market / price mechanism fails to provide goods and services or does so in the wrong quantity leading to the misallocation of resources
What are the 3 types of market failure
-externalities
-under provision of public goods
-information gaps
What is an externality
A cost or benefit of some economic activity that is not reflected in the price
What are negative externalities / external costs
The negative spill-over effects on third parties who were not involved in the economic transaction and is not reflected in the price
What are positive externalities / external benefits
The positive spill-over effects on third parties who were not involved in the economic transaction and is not reflected in the price
Why is the theory of externalities limited
-imperfect knowledge
-measuring the costs/benefits
-size of welfare loss / potential welfare gain
What is a private good
-rival
-excludable
What is a public good
-non-rival
-non-excludable
What does it mean if a good is non-rival
Consumption by one person does not stop another person consuming it
What does it mean if a good is non-excludable
No one can be prevented from consuming it
What is the free rider problem
Consumers wont pay for goods or services because they are non-excludable so can effectively consume them for free
Therefore the free market does not produce these public goods as there is no profit incentive
This is a misallocation of resources
What is symmetric information
When buyers or sellers have access to the same amount of info
What is asymmetric information
When buyers and sellers have access to different amounts of information
