Market failures Flashcards
What is market failure?
Occurs when the free market fails to deliver an efficient allocation of resources
What causes market failure? (7)
Negative externalities Positive externalities Imperfect information Public goods Monopolies Immobility of factors of production Unequal distribution of income
What are externalities?
Costs or benefits that spill over to third parties external to a market transaction
How do externalities cause market failure?
If the price mechanism does not take into account of the wider costs and benefits to society
What is the marginal private cost?
The cost to an individual or firm of an economic transaction
What is the marginal external cost?
The spillover cost to third parties of an economic transaction
What is the marginal social cost?
The full cost to society of an economic transaction, including private and external costs
What are negative externalities?
A negative spillover effect to a third party member
SC>PC
What are positive externalities?
A positive spillover effect to a third party member
SB>PB
What is a merit good?
A good that would be under-consumed in a free market
How do merit good cause market failure? (2)
Individuals are not aware of the full benefits, information failure
Or there is partial market failure, the good is provided but in the wrong quantity
What is partial market failure?
Where the free market provides a product but with a misallocation of resources
What is information failure?
Consumers are unaware of the full costs or benefits of what they are consuming
What is a demerit good?
A good that would be over-consumed in a free market
What is a public good?
A good that is non-rivalry and non-excludable
What is the free-rider problem?
Where some consumers benefit from other consumers benefit from other consumers purchasing of a good
What is a quasi-public good?
A good that has some of the qualities of a public good
What is a private good?
A good that is both excludable and rivalry
How do public good cause market failure?
The good is not normally provided by the government because they would be unable to supply them for a profit. Will result in complete market failure
What is complete market failure?
Where the free market fails to provide the product at all
What is a monopoly?
A firm that has 25% or more market share
What is a pure monopoly?
When one firm has 100% market share
How does a monopoly cause market failure? (4)
High profits
No incentive to produce goods that consumers value
Consumers cannot switch to alternatives
Resources are not allocated efficiently
What are the potential benefits of a monopoly? (3)
R&D
Economies of scale
International competitiveness
What is occupational immobility?
Workers may find it difficult to secure new jobs, since they lack the skills required
What is geographical immobility?
Workers find it difficult to move to where employment opportunities are
How does immobility of factors of production cause market failure?
Because workers are out of jobs, there is a waste of human capital
What is income?
A flow of earnings to a factor of production over a period of time
What is wealth?
A stock of owned assets
