Market Failure Flashcards
What is the meaning of market failure?
Market failure refers to the failure of the market system to allocate resources efficiently. Market failure occurs when those involved in the economic transaction do not take into account the external costs and benefits in the production and consumption of a good or service.
Give three types of market failure.
1) Externalities - positive and negative.
2) Public goods
3) Information gaps
What is marginal social benefit?
What is marginal social cost?
Marginal social benefit is both the external and private benefits of producing or consuming a product.
Marginal social costs is both the external and private costs of producing and consuming a product.
What are externalities?
Externalities are costs and benefits to third parties who are not directly involved in the economic transaction between producer and consumer. These costs and benefits are not taken into account by those directly involved in the transaction.
Why are externalities a type of market failure?
Give two types of externality. (2)
Externalities are a form of market failure because the market forces of supply and demand are leading to a level of output and consumption above or below the socially optimal level, resulting in an inefficient allocation of resources.
1) Negative externalities - external costs
2) Positive externalities - external benefits.
What are private costs?
What are private costs to the producer? (4)
What are private costs to the consumer?
Private costs are those paid by the producers and consumers involved in an economic transaction.
Private costs to the producer: wages, rent, raw materials and energy.
Private costs to the consumer: Usually the price paid for the good or service provided by the producer.
Give examples of external costs of production. (3)
1) Air pollution - e.g. a noxious gas from a factory.
2) Noise pollution - e.g. from building work associated with a new factory.
3) Pollution arising from the destruction of the rainforest to grow crops.
Give two examples of external costs of consumption.
1) Passive smoking - a non-smoker might suffer adverse health effects from being in the presence of a smoker over a period of time.
2) Overeating - obesity may costs the NHS and in turn taxpayers.
What are private benefits?
What are private benefits to the producer?
What are private benefits to the consumer?
Private benefits are those received by the producers and consumers directly involved in the economic transaction.
Private benefits to the producer will be the revenue generated from the sale of the good or service.
Private benefits to the consumer will be the utility gained from the consumption of the good or service.
What are external benefits?
External benefits are benefits to third parties, who are not directly involved in the economic transaction. They are extra benefits which the consumer and producer directly involved in the economic transaction do not take into account.
Give two examples of external benefits of consumption.
1) Individuals deciding to have vaccination and therefore preventing the spread of disease to others.
2) Households with well-kept gardens increasing the market value of neighbouring properties.
Give two examples of external benefits of production.
1) A farmer who keeps bees - the bees will benefit the surrounding farmers by pollinating their crops.
2) A firm which trains workers in computing skills - other firms may be able to benefit by employing workers from this firm.
What are the two key characteristics of public goods?
1) Non-rivalrous - this means that consumption by one person does not limit consumption by others.
2) Non-excludability - this means that if the good is available for one person then it is available to everyone.
What are private goods?
Private goods are goods which both rival and excludable.
Give three examples of public goods.
1) Street lighting
2) Nuclear defence systems
3) National parks
