Market Failure Flashcards
When does market failure occur?
When there is a misallocation of resources in a free market
What is partial market failure?
A market exists, but it contributes to a misallocation of resources
What is complete market failure?
There is a missing market
What are the reasons for market failure? (8)
Public goods Merit goods Demerit goods Positive externalities Negative externalities Monopolies Inequality Immobility of factors of production
What is a public good?
Will not be provided in a free market. Non-rivalry and non-excludable
What is a private good?
Will be provided in a free market. Rivalry and excludable
What is the free rider problem?
Individuals are able to consume the good by paying nothing towards the cost
How do public goods cause market failure?
If left to the free market, the good will not be provided
What is a merit good?
A good that possess positive externailities. People often under estimate the social benefits
How do merit goods cause market failure?
Generally over priced and under consumed
What is a demerit good?
A good that possess negative externailities People often under estimate the social costs
What are positive externalities?
A positive spill over effect to a third party member
How do positive externalities cause market failure?
Social benefit > Private benefit
What are negative externalities?
A negative spill over effect to a third party member
How do negative externalities cause market failure?
Social cost > Private cost
What is a monopoly?
A firm that has 25% or more market share
How does a monopoly cause market failure?
High prices, cause a barrier to entry
What are the problems with monopolies? (4)
Higher prices
Productive inefficiency
Barriers to entry
Product differentiation
What are the benefits associated with monopolies? (3)
Economies of scale
Global competition
Research and development
What is inequality?
Unfair distribution of income/wealth among a population
How does inequality cause market failure?
People with lower incomes may turn to the government for help
What are the reasons for inequality? (2)
Rising property values
Rising number of people on benefits
How does the immobility of factors of production cause market failure?
Fails to provide an efficient allocation of resources
What are the 2 main types of factor immobility?
Geographical and Occupational
What is the equation of social costs?
Private cost + External cost
What is the equation of social benefits?
Private benefit + External benefit
