Market Failure Definitions

Question 1

Market Failure (3)

Answer 1

• When unfettered markets fail to provide the correct signals and incentives
• So resources fail to be allocated efficiently
• It results in social welfare not being maximised

Question 2

Externalities (4)

Answer 2

• These are third party effects
• That are the consequences felt outside the market i.e by those other than the decision maker
• They are the divergence between private and social costs and benefits
  They can be wanted (positive) or unwanted (negative)

Question 3

Private costs (3)

Answer 3

• Are felt by only the decision makers (first and second parties)
• They are the consequences recieved inside of the market
• They are social consts minus negarive externalities

Question 4

Social costs (3)

Answer 4

• Are felt by the whole of society (first, second and third parties)
• The addition of pricate and external costs

Question 5

Cost Benefit Analysis (3)

Answer 5

• It is most commonly used when referring to the decision-making process of governments over major projects
• It generally considers the social costs and benefits using money as a measure of value
• That is, it includes private costs and benefits and externalities

Question 6

Time preference (2)

Answer 6

• This is the idea that people will rather have things sooner than later
• It requires future cost and benefits to be converted into their present discounting for accurate comparison

Question 7

Public Goods (3)

Answer 7

• These are things that can be consumed by everybody in a society, or nobody at all
• They are characterised by non-excludability
• And non-rivalry

Question 8

Non-excludability (2)

Answer 8

• Goods cannot be confined to those who have paid for it
• Once the good has been provided, non-payers can free ride

Question 9

Free riding (1)

Answer 9

• Thre ability to consume a good without having to pay for it

Question 10

Non-rivalry (1)

Answer 10

• Consumption by one person does not reduce the availability or the utility recieved of the good to others

Question 11

Valuation problem (2)

Answer 11

• Since public goods are not traded, they do not have a market determined price
• This makes it difficult for the government to measure the benefits that consumers recieve in consuming the good and therefore makes it difficult for the government to decide how much of the public good to provide

Question 12

Asymmetric Information (2)

Answer 12

• Agents on one side of the market
• Have much better information than those on the other side

Question 13

Adverse selection (2)

Answer 13

• When you choose to do business with people you would be better off avoiding
• Often caused by asymmetric markets