Market Failure Flashcards
Types of goods
Private
Club
Common property goods
Public goods
Rival and non rival consumption
Consumption by one person reduces the supply to other consumers, in non rival consumption this does not take place
Excludable and non excludable
Excludable- can exclude non payers
Non excludable- can not stop someone from consuming without paying
Private good characteristics
Rival in consumption
Excludable from non payers
Car, house, furniture, clothing
Exclusion principle
Those consumers who are willing and able to purchase a product gain exclusive rights of ownership & the benefits that can be derived from that ownership
Public good
Non rival in consumption
Non excludable
Lighthouse, national park, national defence
Common property resources and goods
Rival in consumption
Non excludable
Forests, fish in the ocean, the atmosphere
Club good
Non rival in consumption
Excludable
Netflix, Internet, gymnasium
Free rider
People who consume products without paying for them
Tragedy of the commons (problem with common resources)
Refers to a dilemma in which many individuals acting independently in their own self interest can destroy a shared resource
Problem with public goods
Non rival, non excludable characteristics therefore they aren’t demanded or supplied
Without demand or supply market can not set price
With glut of free riders and no clear property rights little incentive to be supplied, can’t create profit because can’t exclude non payers
Natural monopoly
Markets for club goods develop to
Characteristics: high set up/start up costs (eg. Electricity distribution grids)
Continuous economies of scale/ falling long run average costs as scale grows (pay TV for providing sporting events as subscribers grow)
Information gaps are a problem
Distort demand curves
- Experience products- lack info on quality so judge quality on price
- Bandwagon products- consumers lack info on a product so follow choices made by others
Merit goods
Products under consumed
Eg. Edu, health care and arts facilities
May under consume bc. Lack info about costs and benefits
Bc. Positive externalities generated are not included
De-merit goods
Products people over consume
Eg. Drug taking, smoking, accessing pornography, gambling, drinking sugary drinks and eating fast food
Associated w. Negative externalities as consumption imposes spin-off costs on third parties
