Market failure definitions

Question 1

Allocative efficiency

Answer 1

The most efficient allocation of resources, where no resources are wasted and the needs and wants of a society are at its maximum satisfaction.

Question 2

Technical efficiency

Answer 2

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.

Question 3

Dynamic efficiency

Answer 3

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.

Question 4

Inter-temporal efficiency

Answer 4

Achieved when society has achieved the right balance between resources used for current and future consumption.

Question 5

Market failure

Answer 5

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.

Question 6

Public goods

Answer 6

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.

Question 7

Positive externality

Answer 7

-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.

Question 8

Negative externality

Answer 8

Negative externality in production - occurs when a firm produces a good or service that imposes costs to another economic agent not involved in the transaction.

Question 9

Asymmetric information

Answer 9

Refers to a market transaction where one party has access to more information than the other.

Question 10

Common access resources

Answer 10

Are not owned by anyone, usually do not have a market price and therefore are available to anyone even if they do not pay for them. Example: fish in the ocean

Question 11

Subsidies

Answer 11

The government providing producers/suppliers with financial or other forms of assistance.