market failure Flashcards
market failure definition
free market equilibrium does not lead to a socially optimal allocation of resources. too much or too little of a good/service is produced or consumed
externality definition
when a third party to a transaction is impacted by the consequences of it. aka spill over effect
negative production externality
when too much of a good is produced and there is a negative third party spillover effect in production eg pollution. social costs higher than private
marginal private costs
the cost to individuals or firms of producing an extra unit
marginal external costs
the costs to third parties of the production or consumption of an extra unit
marginal social costs
the costs society pays for producing or consuming an additional unit
negative consumption externality
too much of a good or service is consumed and there is a negative third party spillover effect in consumption. social benefit is lower than private benefit
positive production externality
not enough of a good or service is produced which has a positive spillover effect in production. social costs are lower than private costs
positive consumption externality
not enough of a good is produced or consumed which has a positive third party spillover effect in consumption. social benefit is higher than private benefit
marginal private benefit
the maximum a consumer will pay for an additional unit of a good or service
marginal external benefit
the benefit from consuming or producing an extra unit of a good or service to the third party
marginal social benefit
the benefit to society of producing or consuming an additional unit of a good or service
information failure
lack of information results in consumers and producers making decisions that do not maximise welfare
3 ways info failure occurs
lack of perfect knowledge, asymmetric information and under/overvaluing the costs/ benefits
moral hazard
the actions people take after they have entered a transaction that make the other party worse off e.g reckless driving once car is insured
merit goods
goods/services considered to be beneficial for people which are underconsumed in a free market, due to info failure
why do merit goods cause market failure
consumers overvalue the short term costs and undervalue the long term benefits of consumption so consume less than they should
evaluate the extent of market failure for merit goods
depends on the size, type of intervention available, willingness of consumers to change and the root of the info failure
demerit goods
overconsumed when left to the free market
how to demerit goods cause market failure
consumes overvalue the short term benefits and undervalue the long term costs of consumption so consume more than they should
public goods
goods which are non-excludable (cant stop people from benefiting) and non-rival (one individuals consumption does not take away from anothers)
free rider problem
consumers will not pay for a good as they cannot be stopped from benefiting therefore no rational firm will provide the good due to the lac of profit incentive so they must be provided by the state
quasi-public goods
have one characteristic of a public good
why should governments provide public goods
state provision prevents under/over consumption so improves social welfare. provision may be more efficient due to economies of scale, addresses inequalities of income
why should governments not provide public goods
they are free at the point of use but funded by taxation and may not be benefitting all taxpayers. if the government becomes a monopoly provider it may fall victim to inefficiency
