Market Failure Flashcards
Define market failure
Occurs when the free market, left alone, fails to deliver an efficient allocation of resources. This results in a loss of economic welfare
Define consumer surplus
The difference between the total amount that consumers are willing and able to pay for a good or service and the total they actually do pay
Define producer surplus
The difference between the total amount producers are able and willing to supply a good for and the price they actually recieve
When does an increase in consumer surplus occur?
Increase in supply
Decrease in demand
When does a decrease in consumer surplus occur?
Decrease in supply
Increase in demand
Define missing market?
A situation in which there is no market because the functions of prices have broken down-Derieves from market failure
What are the main causes of Market Failure?
Positive and Negative externalities Merit and Demerit goods Public goods Monoploys Inequalities in the distribution of income Factor immobility Imperfect information
Define public good
A good that posseses the characteristics of non-excludability, non rivalry in consumption and its non rejectable
Define non-excludability
Once provided, no person can be excluded from benefitting
Define non-rivalry
Consumption of the good by one person does not reducd the amount available for another person
Define non rejectable
If a public good is provided, we cannot avoid it
Examples of public goods
Public fireworks
Clean air
Define quasi public good
A good that has some characteristics of a public good but not all of them
Define private good
A good that is both excludable, rejectable and rival in consumption
Define externalities
Costs or benefits that spillover to third parties external to a market transation
