Market Failure/Market Mechanism

Question 1

When is a market failing/what is market failure

Answer 1

A market is failing when there is misallocation of Resources
(the supplying goods not in the best intrest of society)

Question 2

The 2 types of Market failure

Answer 2

1)Complete market failure

2)partial market failure

Question 3

What is complete market failure

Answer 3

(there is no market for the good at all) A completely missing market

Question 4

What is partial market failure

Answer 4

There is misallocation of resources in the market

Question 5

Misallocation of resources meaning

Answer 5

Supplying goods not aren’t in the best interests of society(over or under consumed goods)

Question 6

The 3 functions of prices purpose

Answer 6

Help allocate resources effectively (if they break down=Market failure)

Question 7

What are 3 functions of prices(reasons for picking a price)

Answer 7

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

Question 8

How does rationing get rid of excess demand

Answer 8

1. 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

Question 9

What are the 2 types of goods

Answer 9

1)Private good: Most goods are.
2)public good(Non)
Non-excludable
Non-Rival

Question 10

non Excludability meaning?

Answer 10

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

Question 11

Rivalry meaning(in relation to goods)

Answer 11

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

Question 12

Why should the government provide public goods

Answer 12

1)free rider problem- leads producers to not supply as theres no incentive

2)prevents under-consumption
(of goods with postive externaties)

Question 13

Define a Public good

hint:Its just its features

Answer 13

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

Question 14

non Excludability meaning?

Answer 14

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

Question 16

Why might Public goods cause Market failure

Answer 16

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

Question 17

Why might Private goods cause Market failure

Answer 17

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)

Question 18

Hospitals and education are examples of ……

Answer 18

Private goods that the Governments provides

The government provides them as they have
lots of positive externatlies

Question 19

Quasi public goods are

Answer 19

Sometimes:
Excludable
Rival

E.G Roads
When there’s traffic-it’s rival

Question 20

Why should Goods that are produced via the environment
E.G FISH/TREES
Be Non-rival

Answer 20

So commons are being consumed sustainably

When its non rival it allows the resource to renew itself

Question 21

What are commons

Answer 21

Natural resources

Question 22

How the government intervene to prevent tradegy of commons

Answer 22

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

Question 23

What is the tragedy of the commons

Answer 23

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

Question 24

Why are private goods a type of market failure

Answer 24

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

Question 25

An example of a private good that led ti Tradegy of the commons

Answer 25

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)