Market Faliure Flashcards
What is market failure
When the competitive market outcome is not the best outcome to society
Give an example of a negative externality of production
Factories polluting the local environment
What is a negative externality of production
When the process of creating a good or service creates a negative consequence for a 3rd party
What is an externality in consumption
When consuming a good or service creates an impact on a 3rd party
Give an example of a negative externality of consumption
Smoking
how are the demand and supply curves labelled if the externality is in production
D = MPB = MSC
S = MPC
How are the demand and supply curves labelled if the externality is in consumption
D = MPB
S = MPC = MSC
What is information failure
Where individuals or firms lack the necessary information to make an informed decision
What are the 4 types of information failure
Asymmetric information
Moral Hazard
Merit goods
Demerit goods
What is asymmetric information failure
When one side of a transaction has more information than the other
Why is a dodgy car salesman such a good example of information failure
Because they know about the potential damage to the car but the purchaser does not
What is a moral hazard in relation to information failure
A situation in which one party engages in risky behaviour because they know someone else will bear the consequence
Give an example of moral hazard
Banks in 2008
How can moral hazard be avoided
Create incentives to act morally
Penalise bad behaviour
Split up banks
Pay people based on performance
What are merit goods
Goods that are under-consumed due to consumers not fully understanding their benefit
What are demerit goods
Goods that are over-consumed because consumers do not know their negative effects
What are public goods
Goods that are non-excludable and non-rivalrous
What is a good that fulfils some characteristics of a public good but not others called
A qusi-public good
Why can public goods only be provided by state provision
Due to the non-excludable nature of public goods and the existence of free riders firms would be unable to effectively charge the use of public goods
Pollution Permit System
A system for controlling pollution based on a market for permits that allows firms to pollute
What are pollution permits systems good
They create incentives to cut pollution
effective at controlling the total level of pollution
Why are pollution permit systems bad
Must be enforced
Complex
What is the process of contracting out
A situation in which the public sector outsources activities to a private firm
What is competitive tendering
The process in which the public sector calls for private firms to bid for a contract for provision of a good or service
What is public-private partnership
An arrangement by which a government service or private business venture is funded and operated through joint cooperation between the public and private sector
What is the Private Finance Initiative
A funding arrangement under which the private sector designs, builds, finances and operates an asset in return for an annual payment
Give some disadvantages of Public-Private Partnerships
Health and safety issues due to the private sector being less inclined to maintain safety standards
Give an advantage of Public-Private partnerships
Fixed payment incentivizes firms to keep costs low
Risk is shared by both the public and private sector
