Market failure - Public and private goods Flashcards
What is a public good?
Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry.
What is non-excludability?
Situation existing where individual consumers can’t be excluded from consumption.
What is non rivalry?
Situation existing where consumption by one person doesn’t affect the consumption of all others.
What is a free rider?
Someone who directly benefits from a public good but who doesn’t contribute towards its provision.
What is a quasi public good?
They’re either non-rival or non-excludable but not both.
E.g. parks are non-excludable but rivalrous as too many people affects use.
What is a private good?
Goods that have the characteristics of excludability and rivalry.
What is market failure?
When the free market fails to allocate resources efficiently, leading to a net welfare loss for society.
Over/under consumed or over/under produced.
What are the 2 types of market failure?
- Partial market failure
- Complete market failure
What is partial market failure?
When the market functions but it supplies either the wrong quantity of a product or at the wrong price
What are the causes of partial market failure?
It occurs when there are externalities
What is complete market failure?
It occurs when the market doesn’t supply products at all.
i.e. there is a missing market
What are he cause of complete market failure?
Public goods
What’s the main reason why public goods are under produced/not produced at all?
The free rider problem
What is the free rider problem?
This is where someone who hasn’t paid for a good or service takes advantage of the fact that it’s non-excludable by consuming the good that others have paid for.
What is an example of the free rider problem?
Streetlights.
If sufficient numbers of people aren’t willing or able to pay for the lights they are using then at any level of output the firm will be unable to cover costs and so unwilling to provide the service.
In this case, there would be a missing market and very sizeable deadweight loss.
1 solution = council charges all residents.
