market failure AI Flashcards
What is market failure?
Market failure occurs when the allocation of goods and services by a free market is not efficient.
What are the main causes of market failure?
The main causes of market failure include externalities, public goods, information asymmetry, and market power.
True or False: Market failure can lead to an over-allocation of resources.
True
What is an externality?
An externality is a cost or benefit incurred or received by a third party who did not choose to incur that cost or benefit.
What is a positive externality?
A positive externality is a benefit that affects a third party positively.
Fill in the blank: A _____ good is a type of good that is non-excludable and non-rivalrous.
public
What is a negative externality?
A negative externality is a cost that affects a third party negatively.
Which market structure is often associated with market power?
Monopoly
True or False: Public goods are typically provided by the private sector.
False
What is information asymmetry?
Information asymmetry occurs when one party in a transaction has more or better information than the other party.
What is the ‘free rider’ problem?
The free rider problem occurs when individuals benefit from resources, goods, or services without paying for them.
Fill in the blank: A good that is both non-excludable and rivalrous is called a _____ good.
common
What is the role of government in correcting market failure?
The government can intervene through regulation, taxation, or providing public goods to correct market failures.
What is a merit good?
A merit good is a good that is deemed beneficial for individuals and society, which is under-consumed in a free market.
True or False: Market failure is always permanent.
False
What is a demerit good?
A demerit good is a good that is considered harmful and over-consumed in a free market.
What is the difference between private goods and public goods?
Private goods are excludable and rivalrous, while public goods are non-excludable and non-rivalrous.
What is the ‘tragedy of the commons’?
The tragedy of the commons refers to the overuse of a shared resource due to individual self-interest.
Fill in the blank: Externalities can lead to _____ in market outcomes.
inefficiencies
What is the purpose of government intervention in the case of negative externalities?
To reduce the negative effects and encourage more efficient resource allocation.
What is a subsidy?
A subsidy is a financial support extended by the government to encourage the production or consumption of specific goods.
True or False: Taxes are a method to correct for positive externalities.
False
What is the impact of monopolies on market failure?
Monopolies can lead to market failure by restricting output and raising prices above competitive levels.
What does ‘allocative efficiency’ mean?
Allocative efficiency occurs when resources are distributed in such a way that maximizes total welfare.
What is ‘productive efficiency’?
Productive efficiency occurs when goods are produced at the lowest possible cost.
Fill in the blank: The _____ curve represents the willingness to pay for a good.
demand
What is the ‘invisible hand’?
The ‘invisible hand’ is a metaphor for the self-regulating nature of the marketplace.
What is a ‘market failure’ example related to healthcare?
Under-provision of vaccines due to positive externalities.
True or False: Government regulations can sometimes create new market failures.
True
What is the significance of ‘market equilibrium’?
Market equilibrium is the point where supply equals demand, leading to an efficient allocation of resources.
Fill in the blank: Market failure often leads to a loss of _____ welfare.
social
What is a ‘public good’ example?
National defense.
What is the purpose of price controls?
To limit the prices that can be charged for goods and services in a market.
What is a ‘natural monopoly’?
A market where a single supplier is more efficient than multiple competing ones, often due to high fixed costs.
What does ‘Pareto efficiency’ refer to?
A situation where no individual can be made better off without making someone else worse off.
True or False: Market failures can only be addressed through government intervention.
False
What is the ‘Coase theorem’?
The Coase theorem states that private parties can negotiate without cost over the allocation of resources.
What is an example of information asymmetry?
A used car salesman knowing more about the car’s condition than the buyer.
Fill in the blank: A _____ is a situation where the market fails to allocate resources efficiently.
market failure
What is the role of competition in preventing market failure?
Competition encourages efficiency and innovation, reducing the likelihood of market failure.
What is the consequence of market power on consumer choice?
Market power can limit consumer choice and lead to higher prices.
True or False: Externalities only affect consumers.
False
What is the significance of correcting market failures?
Correcting market failures is essential for improving overall economic welfare.
