Market failure Flashcards
Learn them all u piece of shit
Externalities
the effects that producing or consuming a good/service has on people who aren’t involved in the making, buying/selling and consumption of the good/service
Positive Externalities – the external benefits to a third party
Negative externalities – external costs to a third party
Ignoring negative production externalities - graph analysis
- Optimal output level = Q1 and optimal price = P1
- In free market, output = Qe and Pe
- Causes overproduction and underpricing of good – more is produced and sold at lower price than desirable for society. For each unit produced between Q1 and Qe, MSC > MPC
- Area ABC = welfare lose – the loss to society caused by ignoring externalities
Ignoring Positive Consumption Externalities - graph analysis
- As no negative externalities MPC = MSC
- Causes under-consumption and under-pricing – less is consumed and sold at lower price than desirable for society. For each consumed between Qe and Q1, MSB > MPB
- Area DEF = potential welfare gain – the gain to society lost by ignoring positive consumption externalities
Ignoring negative consumption externalities - graph analysis
- MSB > MPB
- In free market, output = Qe and Pe
- Causes overproduction and overpricing of good – more is consumed and sold at higher price than desirable for society. For each unit produced between Q1 and Qe, MSC > MSB
- Area ABC = welfare lose – the loss to society caused by ignoring externalities
Ignoring positive production externalities - graph analysis
- MPC > MSC
- Causes under-production and over-pricing – less produced and sold at higher price than desirable for society. For each consumed between Qe and Q1, MSC > MSB
- Area DEF = potential welfare gain – the gain to society lost by ignoring positive consumption externalities
Externalities - Equilibrium and socially optimum point
In free market consumers and producers only consider PB and PC -> MPC curve = supply curve and MPB = demand curve -> equilibrium occurs when MPC=MPB
Socially optimum level of output is where MSC = MSB as this included external costs and benefits to society -> will give society max benefit of positive ext. and cover costs of negative ext.
Lack of property rights can cause negative externalities
Absence of property rights can result in production and consumption ext. and market failure.
Extending property rights -> ext. accounted for
Absence of property rights generally leads to overuse/misuse of scarce resources and environmental damage
Public goods
those that possess two key characteristics: they’re non-excludable and non-rivalrous
Non-excludable – where it’s not possible to prevent non-paying customers from consuming a good e.g. lighthouse light can be used for all boats
Non-rival – where one person’s enjoyment of good doesn’t diminish another’s enjoyment of good e.g. listening to radio doesn’t harm another listeners enjoyment
Non-pure public goods – can exhibit traits of public good
New tech can change good that once had traits of public good into private good
Private good
– a good that is rival and excludable in consumption. Most goods are private goods
Free rider problem
– occurs when people can benefit from good/service without paying anything towards it. Common in public goods. e.g. pollution reductions. With this, price mechanism won’t work and hard to put value on good
Tragedy of the commons
– the idea that people acting in own best interests will overuse common resource without considering that this will lead to depletion/degradation of that resource. Can explain lots of causes of environmental market failure
Demerit goods
– goods whose consumption is regarded as being harmful to people who consume them but people usually unaware about harm that demerit goods cause
- Have harmful on society due to -ve ext. from consumption
- Generate negative ext.
Reasons for overconsumption of demerit goods
- Negative ext. ignored -> production and consumption will be > socially optimum level
- Imperfect info -> consumers don’t realise harm demerit goods cause
- Temporal myopia (people only consider short term costs/benefits
- Lack of alternatives
- Addictiveness
Merit goods
– goods whose consumption is regarded as beneficial to society
- Provide benefits to individuals and society, but people usually unaware of full benefits they provide e.g. health care, education
- Generate positive ext.
Immobile factors of production
Reasons for geographical immobility – house price, rent, cost-of-living differences between areas make it difficult for workers to move for work. Reluctance to leave family and friends. Imperfect info on jobs available in different area
Reasons for occupational immobility – lack of training, skills, education, experience for new job.
Resources used inefficiently -> resources often unused/underused – allocative ineffiency hence market failure. Gov’ts can’t move land and can’t force workers to relocate. Could provide relocation subsidies, offer incentives for construction of housing for new workers, and provide training programmes
