Market Failure Flashcards
When does market failure occur
When the free market fails to allocate scarce resources at the socially optimum level, leading to a net loss in social welfare
Complete market failure
Markets fail to lead to any production of goods/services; no market exists
Given example of a missing market
National defence this means Government needs to intervene to provide it
Partial market failure
Where the market exists, but there is an over-production or underproduction of goods
Given example of partial market failure
The provision of health care.
If left completely to market forces, then some people would not be able to afford the treatment they need. As a result governments may intervene and provide free health care.
Example of a public good
Flood defence scheme
Street lighting
Characteristics of public goods
Non-excludability: People cannot be stopped from consuming the good even if they haven’t paid for it
Non-rivalry: One person benefiting from the good does not stop others also benefiting
….Is always available for consumption by others when consumed by an additional person
Define externalities
The negative or positive impacts on third parties as a result of production or consumption
Where is the socially optimum level on the an externalities diagram?
Occurs where external costs and benefits to society have been included, which is where MSC = MSB
Why do tradable pollution permits exist?
They are designed to reduce the negative externalities arising from production
What is a negative externality?
The external costs suffered by a third party as a result of an economic transaction
What is a de-merit good?
A good which generates negative externalities in consumption
What is the free rider problem?
Means that once a public good is provided it is impossible to stop someone benefiting from it, even if they haven’t paid towards it
What is government failure
When gov intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources.
What is a merit good?
A good or service which provides greater social benefits when it’s consumed, than private benefits.
Tend to be under-consumed
