Market Failure/Market Mechanism Flashcards
When is a market failing/what is market failure
A market is failing when there is misallocation of Resources
(the supplying goods not in the best intrest of society)
The 2 types of Market failure
1)Complete market failure
2)partial market failure
What is complete market failure
(there is no market for the good at all) A completely missing market
What is partial market failure
There is misallocation of resources in the market
Misallocation of resources meaning
Supplying goods not aren’t in the best interests of society(over or under consumed goods)
The 3 functions of prices purpose
Help allocate resources effectively (if they break down=Market failure)
What are 3 functions of prices(reasons for picking a price)
1)Signalling-prices send a signal to producers/buyers to act or plan accordingly
E.G. increase in price sends a signal to producers
2)Rationing-when prices increase only a limited amount of people can/will buy
Therefore the good is being rationed(limited)
3)Incentives- higher prices acts as an incentive for producers
To increase supply to maximise profits
How does rationing get rid of excess demand
- There is excess demand for a good(demand>supply)
2.sends a signal to producers to increase prices
3.which decreases demand as less people can/will buy at higher price
4.this rations the good(limits) which gets rid of the excess demand
What are the 2 types of goods
1)Private good: Most goods are.
2)public good(Non)
Non-excludable
Non-Rival
non Excludability meaning?
its difficult or impossible to prevent people from enjoying the benefits of the good
usually limited
Non-Excludable:
lighthouse/wave barriers/public roads/army defense
Rivalry meaning(in relation to goods)
one person’s consumption of a good diminish its availability for others for others to consume
E.G. I buy the last sport ticket but u wanted it= we are now ‘rivals
A house/shoes/ipad/food
Why should the government provide public goods
1)free rider problem- leads producers to not supply as theres no incentive
2)prevents under-consumption
(of goods with postive externaties)
Define a Public good
hint:Its just its features
1)Non excludable
difficult/impossible to prevent people from enjoying the benefits of the good
2)Non rival
1 person’s consumption of the good* doesn’t diminish its availability* for others
non Excludability meaning?
its eastbto prevent people from enjoying the benefits of the good
(as prodcers limit it)
E.G sport ticket/ shoes
like travis’s back in the day
Why might Public goods cause Market failure
Leads to Free-rider problem
Which in turn leads to
Missing markets
(Complete market failure)
As:
1)consumers won’t demand
2)Suppliers won’t supply
(no profits)
E.G ull stop buying ur roads street light in hopes of ur neighbour buying it
Why might Private goods cause Market failure
Leads to the Tradegy of the commons
As private firms are driven by profit/self gain
(They don’t care about the environmental implications they cause)
Hospitals and education are examples of ……
Private goods that the Governments provides
The government provides them as they have
lots of positive externatlies
Quasi public goods are
Sometimes:
Excludable
Rival
E.G Roads
When there’s traffic-it’s rival
Why should Goods that are produced via the environment
E.G FISH/TREES
Be Non-rival
So commons are being consumed sustainably
When its non rival it allows the resource to renew itself
What are commons
Natural resources
How the government intervene to prevent tradegy of commons
Permit
The commons would be used sustainably
and would remain non-rivalrous
(so one’s consumption doesn’t diminish its availability )
E.g brazil government has capped the amount of logging and given out permits
What is the tragedy of the commons
commons – are used unsustainably, they are rivalrous goods, which can benefit only firms/some people (and not everyone in which they should)
Due to firms incentivised to refit from the commons , so they consume Sustainable threshold
Depliting commons
Making them rival good
Why are private goods a type of market failure
They lead to the Tradegy of the Commons(resources)
Private firms are incentivised to profit as much as possible from the commons.
so, they consume an unstainable amount
Depleting the resource
This is :
misallocation of resources
An example of a private good that led ti Tradegy of the commons
Due to profit maximising firms
Doing a massive fishing operations,
the stock of cod on the coast of Canada is just 1% of what it was in the 1970s.
(1%of amount it could be)
