Market Failure Test Flashcards
Positive externalities meaning
Production or consumption of the good imposes external benefits on the third party (outside the market)
Positive externalities
Fails to value them correctly
- Under consumed or under provided
- Merit goods(education and healthcare)
- graph goes down n.t.s
- increase in production gets us to social optimum point
- offer subsidy to encourage consumption
Negative externalities meaning
Production or consumption imposes external costs to the third party laying outside of the market. Of which no compensation is paid
Negative externality details
- over consumed/over provided
-social cost exceeds private cost
-demerit goods( alcohol, tobacco)
Chemical industry, construction industry, gambling
Marginal private cost
Marginal social cost
MPC- cost on the individual from any economic interaction
MSC- cost of the economic interaction on wider society
Marginal private benefit
Marginal social benefit
MPB- when the individual buys something for their benefit
MSC- when society benefits off of an economic interaction
External benefit
Lower costs for other parties
Increased revenues for other parties
Increased satisfaction for other parties
Public goods meaning
Collective consumption of goods provided by the government.
- because the private sector fails to provide them
Public goods characteristics
Non-excludable- benefits derived from public goods cannot be confined solely to those who paid for it. Non payers can benefit(free rider)
Non-rival- the consumption of the public good cannot restrict other people from enjoying it
non-rejectable- the collective supply of public goods means that people can’t reject it e.g. flood defence schemes
Quasi public goods
Near public goods
Semi non rival- more people use park, restricting other people from finding space . But they still can use it
Information gaps
Occur when either the buyer or seller does not have access to the information needed in making a fully informed decision
Information gaps examples
- nutritional content in food and drinks
- risks of using tanning salons
- complexity of pension schemes
- uncertain quality of second hand products
Asymetrical information
When one individual or party knows much more information than the other party and uses it to their advantage by exploiting the other party
Asymmetrical information examples
A borrower(small business) has better information on the likelihood that they will be able to repay the loan to the lender
