Market Failure Flashcards
(52 cards)
What is allocative efficiency
Occurs when a market is at equilibrium/occurs where consumer satisfaction is maximised/ occurs where quantity supplied equals quantity demanded
In market failure what is demand
Marginal benefit
In market failure what is supply
Marginal cost
What is market failure
Where the free market mechanism fails to achieve economic efficiency
What are externalities
Occurs when a third party is affected by the consumption and/or production of others (can be positive or negative) (spillover effect)
What are incomplete markets
Private sector doesn’t/cannot meet the requirements of the market and some intervention from the state is needed
What are missing markets
Public goods cannot normally be produced at a profit in the private sector
What is information failure
Some of all of the participants in an economic exchange do not have perfect knowledge
One participant in an economic exchange knows more than the other, a situation where it is asymmetric or unbalanced information
What is a lack of property rights
Producers and consumers have the right of ownership of the resources exchanged. Markets are less effective when property rights do not exist
What is factor immobility
Geographical immobility- people can’t move region for a job
Occupational immobility- wrong qualifications
What is lack of competition
A market that isn’t competitive is called a monopoly
6 elements to consider regarding costs and benefits
Private costs Private benefits External costs External benefits Social costs Social benefits
What are private costs
Costs to individuals or firms of consuming or producing an item
What are private benefits
The gains to individuals or firms from consuming or producing an item
What are external costs
The costs to other people or organisations of decisions taken by a person or business
What are external benefits
The benefit that a consumer or producers economic activity gives others
What are social costs
Private costs + external costs
Why does a negative externality lead to market failure
In free unregulated markets, externalities cause private and social costs to diverge
This leads to allocative inefficiency
What does the area of overconsumption represent on a graph
MSC>MPC
Area of dead weight welfare loss to society
What are positive externalities of production and consumption
When the production or consumption of a good or service creates a spillover benefit that help a 3rd party
How to draw the graphs of negative and positive externalities of production and consumption
Negative and positive externalities of consumption is the demand curve
Negative and positive externalities of production is the supply curve
Where we are on the curve is what, and where do we want to be
We are at the private cost/benefit
Where we want to be social cost/benefit
How do externalities affect markets
Negative- over-production
Positive- under-production
What are merit goods
Goods and services that people will underconsume and generate positive externalities
