Market Failure Flashcards
When does market failure occur?
when there is an inefficient allocation a goods/services in a free market
What are externalities?
when a third party is affected by the actions/decisions of others
What is a private cost?
when an individual is negatively affected by an economic transaction
What is a private benefit?
when an individual is positively affected by an economic transaction
What is a social cost?
when wider society if negatively affected by an economic transaction
What is a social benefit?
when wider society is positively affected by an economic transaction
What is the equation for social costs?
Social costs = Private costs + Negative externalities
What is the equation for social benefits?
Social benefits = Private benefits + Positive externalities
State a merit good and give an example
a good that has a positive externalities and are usually underconsumed in a free market e.g education or health
State a demerit good and give an example
a good that has negative externalities and are usually over consumed in a free market e.g alcohol or fatty foods
When do positive externalities occur?
when the consumption of a product causes a benefit to a third party
When do negative externalities occur?
when the consumption of a product causes a harmful effect to a third party
How can the government decrease demand for demerit goods?
taxes raise the price and discourages consumers from buying
What are subsidies?
an amount of money the government gives firms to lower the average costs of production and the price for consumers
How can the government increase demand for merit goods?
they can provide subsidies for firms that produce merit goods
What are 4 problems for using tax to decrease demand?
- if demand is inelastic taxing will has little effect
- taxes may be regressive
- it may encourage people to access the good illegally
- collecting tax may be costly
What are the problems of using subsidies to increase demand?
- hard to estimate how much will be effective
- government has to increase taxes to pay for it
- encourages efficiency within firms
- if demand + price are inelastic this will have little effect
What are 5 benefits of the government providing public services?
- when things are free people are encouraged to use merit goods
- positive externalities
- economies of scale
- increases equality
- minimum service standards
When does governement failure occur?
when government intervention leads to misallocation of resources
Name 4 different reasons government failure occurs
- poor information
- political interference - short term rather than long term
- costs of running public services
- lack of incentives - no profit
