Market Failure Flashcards
Define what an externality is
An externality is the cost or benefit that effects a third party who did not choose to receive that cost or benefit
What are the two types of externalities
Positive externalities and negative externalities
What is complete market failure
Complete market failure is where the market simple doesn’t supply the good/service at all
What is partial market failure
Partial market failure is where the market functions but either produces the wrong amount or produces them at the wrong price
What are the three factors of a public good
- Non-excludability
- Non-rival nature
- Non-rejectable
What is the free rider problem
The free rider problem is where non-payers receive benefit of a good/service that someone else paid for
What are the two traits of positive externalities
They are underpriced and under-consumed
What are the two traits of negative externalities
Underpriced and over-consumed
Define what private goods are
Private goods are rival and excludable
What is asymmetric information
Asymmetric information occurs when one party knows more information that the other party
What is the significance of information gaps
The importance is that when making decisions, we trust the other party in the decision and that they are getting us the best deal and not them the best deal
What are moral hazards
Moral hazards occur when an economic agent makes a decision in their own best interest knowing full well there are adverse risks. If the costs result, the cost will be partly borne by other economic agents
What is the principle agent problem
The principle agent occurs when the goals of the principle (person affected by decision) are different from the agents (people making the decision)
