Market failure Flashcards
Allocative efficiency
The most efficient allocation of resources, where no resources are wasted and the needs and wants of a society are at its maximum satisfaction.
Technical efficiency
Occurs when it is not possible to increase the output without increasing the inputs (resources). Productivity is at a maximum and average costs are at a minimum.
Dynamic efficiency
Refers to how quickly an economy can reallocate resources to achieve allocative efficiency or how quickly an economic entity can reallocate is resources from one activity to another.
Inter-temporal efficiency
Achieved when society has achieved the right balance between resources used for current and future consumption.
Market failure
Occurs when the allocation of resources achieved in an economy is inefficient or when resources are allocated in such a way that national living standards or welfare is not maximized.
Four types of market failure
- Public goods
- Externalities
- Asymmetric information
- Common access resources
Public goods
They are non-excludable which means that the supplier cannot stop a person from using/consuming the product. They are also non-rivalrous, meaning that consumption by one person does not lead to a reduction in the amount available for other potential customers. Example: traffic lights.
Free rider behavior means that the market will tend to under allocate resources to public goods as not all consumers can be charged, this means that allocative efficiency is not achieved as society’s wellbeing is not maximized.
Government intervention: public goods
-Subsidies
Subsidies are when the government provides suppliers/producers with financial or other forms of assistance. Example: subsidy to traffic lights so that they can be produced for free.
-Direct government provision
When the government takes full responsibility for the provision of the public good and become the national supplier. Example: Government provides lighthouses.
Externality
Arises when a person is engaged in a transaction or activity that affects the wellbeing of a third party that is not involved.
Positive externality
-Positive externality in production - occurs when a firm produces a good or service that provides benefits to another economic agent not involved in the transaction. Example: A firm that undertakes R and D may eventually result in the production and implementation of new technology. The firm benefits from this as well as other firms and consumers that did not pay for nor conduct the R and D.
Positive externality in consumption - Occurs when the consumption of good or service improves the wellbeing of another consumer, producer or society. Example: Education, a person who undergoes an education gains knowledge and skills and society also benefits as there is a more educated workforce.
All positive externalities will lead to an under allocation of resources.
Government intervention: positive externalities
Government regulation - A law that can ban production of certain activities or impose requirements on producers if they want to engage in certain activities. Example: Australia makes education mandatory between the ages 5 or 6 and 16, creating demand for education services.
Advertising - Governments can create advertising campaigns that promote the consumption of goods and services that convey positive externalities. Example: COVID ad to encourage people to behave appropriately.
Subsidies - The government can intervene in the market to reduce the private costs of producing goods and services in order to promote the consumption and production and internalize positive externalities.
