MArket Failure Flashcards
Define market failure
Market Failure- The market failing to allocate resources efficiently because too much or too little of a good or service is produced or consumed from the society’s point of view. This happens when an external effect or circumstance prevents the condition MPB = MSB = MPC = MSC from being met.
What is a public good
Why would they not get produced?
A good that is non-rivalrous and non-excludable
Free-rider problem
Define merit goods
goods that are beneficial to the individual and society as a whole, and are usually under-provided in a free market.
Define demerit goods
Goods that are considered harmful to the individual and society as a whole, and are usually over-provided in a free market.
Define externality
When the production or consumption of a good or service has an effect on a third party. If the effect is harmful we call it a negative externality. When the effect is beneficial we call it a positive externality.
What does it mean to internalise an externality?
To absorb part of the cost that a good produces to society
Potential ways to internalise an externality
- Impose taxes on the polluting firms: However difficult to gauge cost of pollution, and it doesn’t stop the pollution form taking place
- Laws and legislation: However, could lead to unemployment in market, , and the cost of imposing the laws are high
- Tradable emissions permits- permits issued by the government that give firms the licence to create pollution up to a certain level. Once they are issued, firms can buy, sell and trade them in the market.
What are positive externalities of production?
When the production of a good or service generates a positive effect on a third party or society, which has not been considered in the decision-making process of producing such good.
e.g. Employee training
Solutions to positive externalities of production. What are some of the problems?
- Subsidising firms: difficult to subsidise every firm, there’s an opportunity cost associated with subsidy
- Direct government provision: High costs, lack of expertise, private firms could be disincentivised from producing in the market
what are negative externalities of consumption?
A situation in which the consumption of a good or service generates a negative effect on a third party or society, which has not been considered when deciding to consume that good.
e.g. cigarettes
Solutions to negative externalities of consumption
- Ban or regulate good: however big costs of enforcement, and shareholders suffer, consumers may get pissed
- Indirect tax: However, if good is inelastic, not much effect. Black markets.
- Negative advertisement: Opportunity cost, may not be effective
Define direct tax
A direct tax is paid directly by an individual or organization to the imposing entity. A taxpayer, for example, pays direct taxes to the government for different purposes, including real property tax, personal property tax, income tax, or taxes on assets.
Define positive externality of consumption
when the consumption of a good or service generates a positive effect on a third party or society, which was not considered during the decision-making process.
e.g. education, healthcare
Possible solutions to solving positive externality of consumption
Subsidise firms: However high costs
Direct govt provision: However high costs
Provide advertisement
Legislation: infringement of civil rights, costs of enforcing law
What is a common access resource?
resources that are not owned by anyone, do not have a price, and are available to use without payment. They are rivalrous and non-excludable.
