Market Failure Flashcards
What is a public good
Are non excludable, non rival, and under provided in free market, coz of free-rider problem (eg street lights, flood control systems)
Free rider problem
Ppl benefit from the gd without paying for it, so there is little incentive from private sector to supply as consumers won’t pay for it if they benefit anyway so non-profit- this is partly y public gds are under provided
What are non-rival goods
The benefit ppl get from the gd doesn’t diminish if more ppl consume the gd
What are non-excludable goods
Public goods where once provided, no one is prevented from consuming the gd by someone else consuming it
Y are public gds underprovided
Free rider prob and hard to measure consumer benefit so are often undervalued by consumers (so they pay less)
Gov provide them but the q provided is less than socially optimum q
Solutions for the freerider problem
Direct gov provision- provide through tax, like merit goods (state education improving economic growth)
Make it excludable- e.g. toll roads, fishing license, monitoring or granting copywrite
Advantages of state provision of public and merit goods
Corrects market failure by providing goods that otherwise wouldn’t be provided
Bring equality- equal access
Benefits of the goods themselves e.g. healthy workforce by NHS
Disadvantages of state provision of public and merit goods
Expensive
no price mechanism gov might produce wrong combo of goods as consumers can’t indicate their preferences e.g. too few hospital goods
Gov may be inefficient at production as no competition and no motive to maximise profits
What is information failure
A type of market failure where consumers or producers:
- Don’t have symmetric info (where all relevant info is know by both parties)
- Have asymmetric info (where some parties in a transaction have more info than others)
When imperfect info consumers might pay too much or firms produce wrong amount
What are the three types of info failure
1) Merit and demerit goods
2) Adverse selection
3) Principal-Agent problem
What is info failure (merit and demerit goods)
Ppl don’t realise the full benefits of merit goods e.g. underestimate the benefit of education, which has positive externalities.
In a free market there is an underconsumption of merit goods and over consumption of demerit goods, which have negative externalities
What is info failure (adverse selection)
When sellers have info that buyers don’t or vice versa, about product quality, eg second hand cars or life insurance
What is info failure (principal-agent problem)
When goals of the principle(the one who gains/loses from the decision) are different from the agents (those making decisions on behalf of principle) e.g. child= principle, parents= agents, child has imperfect info and doesn’t see benefits of education and so will devote too few resources (e.g. time and effort) to education if allowed
Policies to tackle info failure
Gove provides info so ppl make informed decisions or force companies to provide info e.g. labels on cig packets
Advantages of gov provision of info
+helps consumers to act rationally
+allows the market to work properly
+e.g. can make D more elastic in long run and so help indirect taxes be more effective at reducing output
