Market Faliure, Efficiencies, Externalities, Merit/Demerit goods, Information faliure Flashcards
What are two main types of efficiency?
- Productive efficiency
- Allocative efficiency
When is productive efficiency achieved?
Productive efficiency is achieved when a certain output has been produced at the minimum possible cost. In other words the firm or the economy produces the maximum output possible using a certain amount of recourse.
Where is productive efficiency on a PPC?
Anywhere on the PPC curve
Define productive efficiency?
Where production takes place using the least amount of scarce resources
When is Allocative efficiency be achieved?
When an economy or firm produces the good or service the consumers, and therefore resources are used at their best
What necessary conditions are needed for an economy to be allocatively efficient?
- The cost of producing one unit of the good equals the market price of that good.
- An economy would be allocatively efficient if everybody received exactly those goods and services for which they were prepared to pay the market price
Define Allocative efficiency?
Allocative efficiency exists where consumer satisfaction is maximised. Where the quantity supplied equals the quantity demanded and resources are being used most effectively to satisfy consumers wants
What is economic efficiency?
Where both productive and Allocative efficiency are satisfied
Define market failure?
Where the free market mechanism fails to achieve economic efficiency
Give some causes of Market failure?
- Information failure
- Externalities
- Merit and demerit goods
- Public and quasi-public goods
- Over consumption, under consumption
- Over production, under production
- Occupational and geographical immobility of labour (not AS)
- Concentration of power in markets (not AS)
- Distribution of income and wealth and equity (not AS)
Examples of how some markets don’t work very well?
- Constant rising/falling prices
- Over production
- Under production
Define an externality?
Externalities are spill over effects on third parties arising from production and consumption
Define a negative externality?
An unfavourable spill over effect on third parties arising from production and consumption
What do negative externalities impose on third parties?
External costs
Define a positive externality?
A favourable spill over effect on third parties arising from production and consumption
What do positive externalities impose on third parties?
External benefits
What are private costs?
The costs involved in an action borne directly by the decision makers
What are external costs?
The costs borne by a third party or to society as a whole
What are social costs?
Social cost = Private cost + external cost
They are the full costs to society of the production or consumption of any good.
What are private benefits?
They are benefits that accrue directly to the decision makers
What are external benefits?
They are the benefits accrued to a third party or to society as a whole
What is the social benefit?
Social benefit = Private benefits + External benefits
The full benefits to the society of production or consumption of any good
When does a negative externality arise?
When the private costs of an economic activity is greater than the social costs
When does a positive externality arise?
When the social benefit is greater than the private benefit
What does a negative externality from production lead to?
It leads to overproduction
Describe negative externality from production in terms of SC and PC?
PC>SC
What does a positive externality from production lead to?
Underproduction
Describe positive externality from production in terms of SC and PC?
SC >PC
What does a negative externality from consumption lead to?
Over consumption
Describe negative externality from consumption in terms of SB and PB
SB < PB
What does a positive externality from consumption lead to?
Under consumption
Describe positive externality from consumption in terms of SB and PB
SB > PB
Define information failure?
Information failure occurs when a lack of information results in consumers and/or producers making decisions that do not maximise their welfare
What can information failure be caused by?
- misleading information
- lack of understanding or awareness among consumers
- persuasive advertising
Define asymmetric information failure?
Where information is not shared equally between consumers and producers
Give an example of asymmetric information failure?
HEALTH CARE
- The patient depends on the doctor’s knowledge to diagnose a disease.
- The doctor could exploit the patient by charging higher fees or recommending more visits than are truly required which could lead to over consumption
Define merit good?
A merit good is a product that is better for a person than that person realises. The benefits to the consumer are greater than he realises
Give examples of merit goods?
- Health care
- Education
- Sports facilities
What are some reasons for the under provision/ consumption of merit goods?
-Information failure
Consumers are not in full possession of all the required information to be able to make the best or the right decision about how much to consume of the product
-Equity Problem
If for example education or health care is provided through the market, low income people will be unable to afford the school or doctors fees
Define De-merit good?
A good that is worse for a person than that person realises. Individual consumers overvalue the benefits from consuming such a good
Give some examples of de-merit goods?
- Cigarettes
- Fast-food
What are some reasons for the over provision/consumption of demerit goods?
- Information failure
- Addiction
solution to under-consumption of merit goods?
- Provision of information
- State provision
- Government subsidies
- Regulation
Solution to over-consumption of demerit goods?
- Taxation
- Regulation
- Provision of information
- Subsidising substitutes
Define a public good?
A public good is a good or service that is both non-excludable and non-rival
Define non-excludable?
Non-excludable means that an individual cannot be prevented from consuming the good or service
Define non-rival?
Non-rival means that consumption by one person doesn’t reduce the amount available for consumption by others
Define a quasi-public good?
A quasi public good has one characterise of a public good but not both
Examples of public goods?
- Pavements
- Traffic lights
- Street lights
- firework display
Examples of quasi public goods?
- beach by the sea
- public libraries
- toll roads
What is the problem with public goods?
- In a free market they will not be provided or demanded
- people are not willing to pay for it
- There would be free riders who want to enjoy the benefit of the goods without paying for them
