Market Failure & Government Intervention Flashcards
Define market failure
The failure of the market system to allocate resources efficiently leading to a net welfare loss
Give three causes of market failiure
Externalities, public goods, information gaps
What is the formula for social costs?
Private costs + External costs
What is a condition for negative externality of production?
Socials costs greater than private costs
What is a condition for positive externality of consumption?
Social benefit greater than private benefit
Define a public good
Good which non rivalrous and non excludable
Define non-excludable
If the good is used, you cannot exclude consumers who haven’t paid for it also using it
Define non-rivalrous
Quality of a good is not diminished for one consumer if other consumers are using it
Explain the free rider problem
When a public good is provided by someone, other people will be able to consume it without paying
How does he free rider problem cause market failure?
Insufficient number of people will be willing to pay for the good so will not be profitable for business to produce it
Define asymmetric information
Where one party in a transaction has more information than the other
Explain how indirect taxes affect negative externalities of production?
Internalises externality by taxing product so PMC increases and output and consumption will be at level at which SMB=SMC
What are merit goods?
Have positive externalities and suffer from information failures
What are demerit goods?
Have negative externalities and suffer from information failures
On externality diagrams, which line is supply and which is demand?
PMC is supply and PMB is demand
