Market Failures, Merit Goods, Demerit Goods, Monopoly, Positive and Negative Externalities Flashcards
Market Failure
This occurs when there is an inefficient allocation of resources in a free market. Market failure can occur due to a variety of reasons, such as monopoly (higher prices and less output), negative externalities (over-consumed and costs to third party) and public goods (usually not provided in a free market)
Causes of Market Failure: Public Goods
A public good is non-rivalrous in consumption. When a person consumes it, it doesn’t diminish for the next person. Non-excludable, no one can be excluded from its benefits including “free riders”. Which is also a reason why firms don’t invest in public goods. Non rejectable, everyone will be subjected to consumption.
Examples are:
Street cleaning services, traffic lights, national defense
Cause of Market Failure: Merit Goods
Goods that are beneficial not just for the individual but people around them as well. Usually underprovided and underconsumed in a market economy.
Cause of Market Failure: Demerit Goods
Goods that are harmful to consumer and third parties. Normally overproduced and overconsumed in a Market Economy, consumers normally overestimate the private benefits over private costs.
Causes of Market Failure: Monopoly
A very large and influential firm. Theoretically, it is the only firm in the entire industry with market shares above 90%.
Impact of Monopoly:
Being sole producer, the monopolist has absolute control over price or output. They would deliberately restrict quantity so they can raise prices.Market Failure as price and quantity are not at the desired level. There is no incentive to work cost efficiently because there are no competitors. Hence, wastages happen on a frequent basis as there is no research and development. Stop listening to consumers as they have limited or no choice. Therefore, in every case money and resources are wasted.
Causes of Market Failure: Info Failure
When one side of the market has better information than the other and therefore makes wrong economic decisions.
Causes of Market Failure: Moral Hazard
When individuals and firms are protected against the consequences of their acts and therefore behave insensibly.
Negative Externalities
Costs that fall onto ‘third parties’ which are measured in monetary value.
Positive Externalities
Benefits that fall onto a third party that is measured in terms of monetary value. Production and consumption of goods that give these benefits are normally lower than the socially desirable level.
