Market Failure Flashcards
Market failure definition
A market fails when it does not allocate resources efficiently
Why might there be market failure (3)
~ production is inefficient
- not maximising output
~ consumers do not get the goods they pay for
- prices don’t reflect true costs
~ bad effect on society
- people operating for selfish reasons - negative externality
Examples of market failure (5)
Air/ noise pollution Monopoly power Lack of control of demerit goods Unstable equilibrium Inequality/ distribution of income
How might the government intervene for demerit goods
Increase the price of demerit goods through taxation
Encourage good behaviour through advertising
If the government does not intervene with the market of cigarettes, what happens to the market, why
It fails
Prices will be too low so QD is too high. Equilibrium is an inefficient allocation of resources
How does the market for cigarettes fail without government intervention (3)
Smokers and passive smokers need smoking related treatment (huge opportunity cost)
Lost output from ill workers unable to work (need benefits which cost money)
Inequality to those who suffer due to passive smoking
Equation that relates social costs, private costs and external costs
Social costs = private costs + external costs
Equation that relates social benefits, private benefits and external benefits
Social benefits = private benefits + external benefits
Who do private costs affect
Firms/ producers
Costs of production
Who do external costs affect
Third parties (People who don't use the good but incur a cost, negative externalities, demerit goods)
Who do the private benefits affect
Consumers
Who do external benefits affect
Third parties (Positive externalities, merit goods)
Why might firms be operating inefficiently (2)
Firm has a monopoly so doesn’t need to (abuse of monopoly power)
Production is inefficient, not allocating resources efficiently
What is a public good (examples)
A good which a market would not provide because the consumer would not be willing to pay
So the government has to provide the good
Eg streetlights, army, police
What is the free rider problem… What does the government do
Someone taking advantage of someone who is willing to pay
The government provided the public goods because of the free rider problem
