MICRO - 6. market failure ✅ Flashcards
what are the types of market failures
MARKET FAILURE - resources inefficiently allocated bc of imperfections in working of market mechanism. there is :
COMPLETE MARKET FAILURE - fails to supply any of good demanded, missing market created (market mechanism fails to supply)
PARTIAL MARKET FAILURE - market exists but overproduction/underproduction occurs
what is an externality
third party, spillover effects of production/consumption and no appropriate compensation paid, outside of market itself
externalities lead to market failure
benefits of economic activity
benefits of consumption of additional unit:
marginal PRIVATE benefit (MPB) - benefit to consumer
marginal EXTERNAL benefit (MEB) - benefit to third parties
marginal SOCIAL benefit (MSB) - benefit to society, MSB = MPB + MEB
what are the costs of economic activity
costs of producing another unit of output:
marginal PRIVATE cost (MPC) - cost to producing firm
marginal EXTERNAL cost (MEC) - cost to third parties
marginal SOCIAL cost (MSC) - cost to society, MSC = MPC + MEC
what is the tragedy of commons
where property rights are unprotected so overuse of common land leads to permanent damage
what is a negative externality
occurs when production/consumption imposes external costs on third parties and these costs left unpaid
social benefit of consumption < private
if exist, should be added to firms supply curve (private marginal cost curve, PMC) to find marginal social cost curve (MSC)
how can governments intervene with negative externalities
imposing a tax increasing MPC for consumer/producer so D and production decreases
what is involved with positive externalities
production/consumption creating third party external benefits
social benefit of p/c > than private
positive externalities = underconsumption as free market fails to value correctly
if external benefits exist market delivers output below quantity maximising social welfare
what is a public good and its characteristics
causes market failure due to missing markets
characteristics:
- NON EXCLUDABILITY - non payers with no financial cost enjoy benefits “free rider”
- NON RIVALROUS - someones consumption not restricted by someone else, marginal cost of S = 0
- NON REJECTABLE - cant reject it
what are the characteristics of a private good
- EXCLUDABLE - buyers excluded if willingness and ability not there
- CONSUMPTION RIVALRY - one persons limits another’s. scarce resources
- REJECTABLE
what is a quasi public good
near public good but not all characteristics:
- SEMI-NON-RIVAL - up to an extent consumers don’t reduce space for others
- SEMI-NON-EXCLUDABLE - difficult/expensive to exclude non-paying
technology can blue between private and public
what is a merit good and what does it involve
goods/services government feel are under-consumed, provided by both state and private can be rival, excludable and rejectable
imperfect information so individuals may not act in own interest don’t understand private benefits
argued to generate positive externalities social > private benefits
what is a demerit good and what does it involve
thought to be bad for you, negative externalities created - social consumption costs > private
what is a demerit good and what does it involve
thought to be bad for you, negative externalities created - social consumption costs > private
free market may fail to take negative externalities into account because social > private costs
how can government intervene with merit and demerit goods
MERIT - providing merit goods encouraging consumption so positive externalities achieved to overcome information problem
DEMERIT - implementation of taxes or banning goods to reduce demand but risk of secondary markets arises
