Market failure, Externalities, Public Goods- MM Flashcards
What is market failure?
Market failure exists when the competitive outcome produced by the operation of the free market is not the best outcome for society
When does an externalitiy occur?
When the production or consumption of a good or service causes an impact for an unrelated third party
What is a negative externality of production?
When the process of producing a good or service creates a negative consequence for individuals or groups outside the business e.g. pollution
What is a negative externality of consumption?
When the process of consuming a good or service creates a negative consequence for individuals or groups not consuming it e.g. second-hand smoking
What is a positive externality of production?
When the process of producing a good or service creates a positive consequence for individuals or groups outside the business e.g. a business builds an attractive tourist attrction
What is a positive externality of consumption?
When the action of consuming a good or service creates a positive consequence for individuals or groups not consuming it e.g. individuals cycling & not driving reduces traffic congestion
How do you get social costs?
Private costs + External costs
What is a private cost?
Something affecting the individual only
What is an external cost?
Something affecting others
What are the 1) demand & 2) supply curve also known as?
1) MPB
2) MPC
What is it called when MPB=MPC?
Free market allocative efficiency
When is it allocative efficiency?
When MSB=MSC
What could the P axis also be labelled as?
Costs & benefits
If there is a positive externality in production, what happens on the diagram?
The D/MPB curve = MSB
The S/MPC curve shifts right, with this curve being MSC
If there is a negative externality of production, what happens on the diagram?
The D/MPB curve = MSB
The S/MPC curve shifts left, with this curve being the MSC
If there is a positive externality of consumption, what happens on the diagram?
The S/MPC = MSC
The D/MPB curve shifts right, with this curve being the MSB
If there is a negative externality of consumption, what happens on the diagram?
The S/MPC = MSC
The D/MPB curve shifts left , with this curve being the MSB
Where do you find welfare loss after an externality in production?
Find the vertical distance between the MPC & MSC and shade the triangle
Where do you find welfare loss after an externality in consumption?
Find the vertical distance between the MPB & MSB and shade the triangle
If the externality is 1) Positive & 2) Negative which way does the triangle point?
1) Right
2) Left
What is marginal social cost (MSC)?
The additional cost of producing one extra unit of a good
What is marginal social benefit?
The additional benefit that society gains from consuming an extra unit of a good
What is information failure?
A type of market failure where individuals or firms have a lack of information about economic decisions
When does information failure occur?
When economic agents make incorrect decisions due to a lack of appropriate information- causing a welfare loss to society
What are the 4 types of information failure?
1) Asymmetric information failure
2) Moral hazard
3) Merit goods
4) Demerit goods
What is asymmetric information failure?
When one party has access to information the other party doesn’t (one sided info)
What is moral hazard?
Where one party engages in risky behaviour or fails to act in good faith because it knows the other party will bear the economic consequences of the behaviour
What are merit goods?
Goods (mainly services) that will be under-consumed by the public as they don’t fully appreciate their benefit
What does a merit good cause on a diagram?
D/MPB shifts right to MSB
What are demerit goods?
Opposite to merit goods- goods over-consumed by the public as they fail to recognise the dangers that they can cause
What does a demerit good cause on a diagram?
MSB curve lies underneath the D/MPB curve (shift left)
Which way does the welfare loss triangle point on a 1) Merit diagram and 2) Demerit diagram?
1) Right
2) Left
When do missing markets occur?
When there is a big demand for a good or service but no free market wants to provide
When do incomplete markets occur?
When there is a big demand for a particular good or service but not enough private sector businesses are interested in meeting this demand
What is a private good?
A good that when consumed, no one else can consume that particular good (e.g. our curry)- they have a large profit incentive
What are public goods?
Commodities or services provided without profit to all members of a society, usually by the government- no profit incentive
What are 4 characteristics of a pure-public good?
1) Non-rivalry
2) Non-excludability
3) Zero marginal cost of production
4) Non-rejectability
What is non-rivalry?
When consumption of a good by 1 individual doesn’t reduce the amount available for consumption by another e.g. street lights, radio station
What is non-exludability?
When consumption of a good by 1 person makes it impossible to exclude any other individual from having the opportunity to consume e.g. public road, street lighting
What is zero marginal cost of production?
Once a public good is provided the cost of providing another is zero e.g. UK armed forces defend the country- one more family adds 0 cost
What is non-rejectability?
Once a public good has been provided, the beneficiaries of that good cannot avoid consuming it e.g. if in England, you cannot choose to be defended by the US instead
What is a quasi-public good?
A good that has only some of the traits of a public good e.g. public roads
How do public goods cause market failure?
The existence of free riders
What is a free rider?
A consumer or business that benefits from a good or service but does not pay for it
Can merit goods always be provided privately?
Yes
What are 4 possible evaluation points for the consumption of merit goods?
1) Duration
2) Gvnmt failure (politicians)
3) Size
4) Unforeseen circumstances
What are 4 possible evaluation points for the consumption of demerit goods and its impact on society? (do= depends on)
1) Elasticity of demand
2) do size of consumption
3) do overseas relativity
4) do government failure
What are 2 possible evaluation points for the production of merit goods?
1) Type (importance)
2) Economic position
What are 4 key roles for the state in a mixed economy?
1) Merit goods
2) Public goods
3) Welfare services
4) Regulation
What are quasi-public goods?
Semi non-rival or semi non-excludable (roads- can be banned from driving)
What impact does technology have on public goods?
Making them more excludable
What are 2 reasons public goods are important?
1) Investment into PG helps long term economic growth & development
2) Technology needs public goods e.g. cars need roads
What are 4 reasons that all sectors of the economy need public goods?
1) Corporate laws
2) Environmental laws
3) Trust in banking systems
4) Power & water treatment laws
What are 5 reasons that government spending on public goods should increase?
1) Economies of scale- more efficient
2) Access & affordability- No profit incentive=affordable- important for equity
3) State provision needed for missing markets
4) Drive long-run economic growth
5) Lead to higher private sector investment
What are 4 reasons that government spending on public goods shouldn’t increase?
1) Absence of profit incentive leads to X-inefficiency & diseconomies of scale (higher costs)
2) Weaker institutions= corruption or wasteful spending (gvnmt failure)
3) More effcient for gvnmt to fund but the private sector to provide
4) Market incentives may promote innovation in the long run
