Market failure Flashcards
name the 4 functions of prices
1) signalling function
2) incentive function
3) rationing function
4) allocative function
define signalling function
provides info allowing buyers & sellers the market to plan and coordinate their economic activity
define incentive function
relative pricing might incentivise purchase of one good over another (if one good is cheaper than another)
define rationing function
rising prices reflect the strength of consumer preferences (contraction & extension of demand) (goods are “rationed” to the people who can afford to pay the rising price)
define allocative function
directs resources away from markets in which prices are too high in which there is excess supply, towards markets where there is excess demand & price is too low
(allocates resources where they are needed)
define partial market failure
when the wrong quantity of a resource is supplied
define complete market failure
when no quantity of a resource is supplied
define market failure
when the price mechanism fails to allocate scarce resources efficiently / when operation of a market forces lead to a net social welfare loss.
define public goods
non-rivalrous, someone cannot exercise property rights over
name the 3 characteristics of pure public goods
1) non-excludability
2) non-rival consumption
3) non-rejectable
define non-excludability
benefits derived from pure public goods cannot be confined solely to those who have paid for it
define non-rival consumption
consumption by one consumer, doesn’t restrict consumption by other consumers
define non-rejectable
the collective supply of a public good for all means that it cannot be rejected by people.
name 2 examples of pure pubic goods
- flood control systems
- broadcasting systems
