Market failure - Chapter 5 (R) Flashcards
What is market failure?
Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market.
how are market structures classified
- no. of sellers
- degree of product differentiation
- barriers to entry (costs)
- degree of control over price
- competitive methods
types of markets
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
perfect competition
very many firms
unrestricted freedom of entry
undifferentiated product
eg, cabbages, carrots
monopolistic competition
many/several forms
unrestricted freedom of entry
differentiated product
eg, builders, restaurants
oligopoly
few firms
restricted freedom of entry
un/differentiated products
eg, cars, cement
monopoly
one firm
restricted/ completly blocked freedom of entry
unique products
eg, local water, train operators
perfect competition features
- large number of small firms
- very little product differentiation
- very easy entry into or exit from the market
- perfectly mobile resources
- perfect knowledge
game theory
rational self interest decisions result in each being worse off than if each had chosen to cooperate
What are the characteristics of an imperfect market?
Competition for market share
Control over price
High barriers to entry and exit
Different products and services
Small number of buyers and sellers.
consumer soveriegnty
consumers know best what is good for them and that their willingness to pay, they can ensure that such goods and services provided in the right quantities.
Types of market failure
include negative and positive externalities, monopolies, inefficiencies in production and allocation, incomplete information, and inequality.
What is the concept of market power?
Refers to a company’s relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both.
What causes market power
There must be inelastic demand for its products
How can Market power influence market efficiency
it makes demand and supply not be at equilibrium which means the market is not running efficiently and therefore market failure and deadweight loss.
What policy options influence market power
the government will encourage the consumption of merit goods and discourage the consumption of demerit goods. governments can also put out campaigns (eg. no smoking)
Definition: Positive Ext
when the consumption or production of a good causes a benefit to a third party.
Example of Positive Ext
vaccines, they help society as a whole be protected from viruses and sicknesses
Definition: Negative Ext
when the consumption or production of a good causes an adverse impact to a third party.
Example of negative Ext
cigarettes, they cause bystanders to become sick from the smoke.
What is the concept of externalities
An externality is the uncompensated impact of one persons actions on the wellbeing of a third party
What influences do ext have on Market efficiency?
when externalities occur the market is not at equilibrium as the marginal social cost/benefit and marginal private cost/benefit are not the same. this means deadweight loss.
What is the use of tax
taxes are used to make negative externalities less consumed
What is the use of subsides
subsides are used to make positive externalities more consumed.
What are policy options that correct ext
taxes, subsidies
merit good
goods and services that the government considers beneficial for the public and will encourage production and consumption of (provide social benefit)
merit good examples
education, healthcare, library, museums
