Market failure Flashcards
What is market failure?
When the price mechanism falls to allocate resources efficiently
What types of market failure are there?
- Externalities (market prices and profits not reflecting the true prices and profits to society of economic activities)
- Under-provision of public goods
- Inforation gaps
What are private costs and benefits?
Costs and benefits internal to the market transaction
What are external costs and benefits?
costs and benefits outside a market transaction
What are social costs?
What are social benefits?
Social costs : Private costs - External costs
Social benefits : Private benefits - external benefits
What features do public goods have?
non-rivalry and non-excludability
What does non-rivalry mean?
Consumption for one person doesn’t use up for another
What does non-excludability?
Once provided can’t stop others consuming
Why are public goods not provided by the private sector?
Due to the free-rider problem
What does asymmetric information mean?
Where buyers and sellers have different amounts of information, with one group having more information than the other.
What is the principal-agent problem?
Occurs when the goals of principals, those standing to gain or lose from a decision, are different from agents, those who are making the decision on half of the principal
