Market failure Flashcards
define market failure
occurs when market fails to allocate scarce resources efficiently
= causes a loss in social welfare
causes of market failure
- externalities= firms follow self interest and ignore social costs
- underconsumption of public goods
- info failure on de-merit goods
- income inequality
- monopoly power= one dominant seller exploits consumers with high prices and low quantity
define complete Market failure
- occurs when market doesn’t provide good or service even though there’s demand for it
= market unable to function in any capacity
= lead to total absence of supply e.g. public goods
define partial market failure
occurs when market provide goods or service but very inefficiently
= usually caused by externalities or info failure
= overproduce or consume de-demerit goods
- may require corrective measures like tax or regulations
= e.g. CO2 taxes address pollution by forcing producers to internalise social cost of environmental damage
describe public goods
- non rivalrous
= Q of good doesn’t decrease after consumption e.g. traffic light - non excludable
= no price can be charged for good
= benefits of consumption can’t be confined to individual that paid for it
= can’t stop someone accessing it= no efficient way to price good - beaches, roads and street lights
describe free rider problem
can’t charge individual for consumption of public good as someone else will gain the benefit wo paying anything= its non-excludable
= someone gets benefit wo paying= ppl wait for others to pay and gain benefit after
= w that incentive no one will pay for public goods= no private motive to supply them= no chance for profit
= create missing market
= complete market failure
define private good
goods that are rivalrous and excludable
= others can’t use them
define quasi-public good
goods that sometimes show characteristics of public goods but also excludable or rivalrous at times
= roads= have toll taxes and congestion charges
describe tragedy of commons
- where lack of private ownership leads to unsustainable exploitation of natural resources leading to depletion of resources
= e.g. sea provides seafood and trees provide paper= no one can claim - caused by self interest
= driven by profit motive= even if one firm stops exploring another firm will use resource to own adv
= nothing left for firm that stopped= only one that will lose out
= leads to resources depletion and low income for future generations
describe Neg Externalities Production
- costs to 3rd parties as a result of actions of producers
= air pollution as a result of producing metals, cancer as result of air pollution etc - MSC>MPC
- firms ignore social costs due to self interest= produce @ private optimum
= leads to over production and consumption - price is too low @P1= incentivise consumption of goods
= exaggerate over consumption issues
= lead to misallocation of resources
describe Negative Externalities Consumption
- costs to 3rd parties as a result of consumption
= smoking= by standers inhale smoke and risk lung cancer, fast food= high costs to treat obesity - MSB<MPB
- consumers only consider private benefits due to self interest
= over consumption and production
= misallocation of resources
= allocative inefficiency and welfare loss
describe positive externalities consumption
- benefits to 3rd parties as a result of the actions of consumers
- healthcare vaccine against the flu= less risk of others getting the flu, education makes more productive workers= higher tax rev
- MSB>MPB
- underconsumption of resources= allocative inefficiency
= @Q1, MSB higher than MSB= losing out on SB if Q* units not produced - individual consumers ignore full MSB of actions
describe positive externalities production
- benefits to 3rd parties as a result of the actions of producers
- in-work training schemes= 3rd party would be other firms who are able to poach workers w skills gained from schemes they didn’t have to pay for= low COP
- MSC<MPC
adv of property rights
- only the producer who owns land will suffer if resources are exploited
= NE internalised
= incentivises private producer to protect land and if property rights enforces, can sue anyone who trespasses
= properly protect land
= decrease mass depletion, deforestation etc
= allocative efficiency= welfare max and fix heart of market failure
disadv of property rights
- can’t efficiently distribute property rights e.g. sea, air etc
- costly to enforce properly
= if not properly enforced risk of mass trespassing= OC - equity issues of who gets rights
= whoever gets them has dominating position in market
define merit goods
goods deemed more beneficial to consumers than they realise
= normative consideration
causes of merit good market failure
- asymmetric info= exists but not shared equally to consumers and producers or may not be clear or present
- e.g. ppl understand generic benefit of education but don’t know much much income exactly they’ll make
= lead to irrational decisions and under-consumption in free-market
define de-merit good
goods deemed more harmful to consumers than they realise
= info failure doesn’t show full extent of LR issues caused by consumption
= lead to irrational decisions of over-consumption
describe asymmetric info failure for employees
- employer has info of demand for labour and skills needed but employee knows full extent of individual skills, experience etc
= employee needs this detailed info when considering employment and can make decision to employ worker
= may not max potential benefits of employing
describe second-hand info failure
seller has perf info of good
= may not tell buyer everything
= cld make irrational decision of purchasing good
= won’t max consumer utility
define asymmetric info
when one party in a transaction has more or better information than the other
define imperfect info
When information is missing or inaccurate
= e.g. a buyer may not know the risk involved in purchasing a financial asset
effects of asymmetric info
- result in moral hazard= individual takes on more risk than usual as it doesn’t bear the full cost of risk e.g. if driver takes on car insurance, more likely to drive riskier
define price discrimination
- where a firm charges different prices to different consumers on an identical good/ service with no differences in COP
- firm must have enough info to separate market and identify different elasticities of demand per group
- must be able to prevent re-sale of a good that could be sold @ lower price level= prevent market seepage
- must have price making ability= monopoly power
