Market Failure Flashcards
4.00
What is market failure?
Market failure occurs when the price mechanism fails to lead to an efficient allocation of resources.
What are the causes of market failure?
When social costs exceed social benefits
Over provision of demerit goods
Under provision of merit goods
Lack of public goods
Immobility of resources
Information failure
Abuse of monopoly power
What is social cost?
Social cost is the cost paid for by the society due to the activities of a firm.
What is private cost?
Private cost is the cost incurred on those who are directly consuming or producing a product.
What is external cost?
External costs are the harmful effects on third parties who are not directly involved with the consumption or production activities.
What is social benefit?
Social benefits are the benefits to society from the consumption or production activities of a firm.
What is private benefit?
Private benefits are the advantages to consumers or producers that arise from the consumption or production of a good/service.
What is external benefit?
External benefits are the beneficial effects on third parties who are not directly involved in the production/consumption activities.
What is a public good?
A public good is a good that is non-rivalry and non-excludable.
What does non-rivalry mean?
Non-rivalry means that the consumption of the good/service by an individual will not reduce the consumption of that same good/service by another individual.
What are merit goods?
Merit goods are goods that have a positive effect on society and ought to be consumed more.
Why do governments provide public goods?
Governments provide public goods because nobody else will. Private sectors have no incentive to provide public goods as they won’t make any profit from it. The provision of public goods also promotes economic efficiency.
What are demerit goods?
Demerit goods are goods which are deemed to be socially undesirable and are often over-produced and over-consumed in market mechanisms.
