Micro – Market Failure Flashcards
What are Common-Pool Resources?
Resources that are rivalrous and non-excludable; examples include clean air or fish in the ocean.
What is the Tragedy of Commons?
As common-pool resources are non-excludable they can be overused and therefore depleted. An example involves soil degradation due to over-grazing of cattle.
What is Unsustainable Production?
Production that uses resources unsustainably, depleting or degrading them. In the real-world common-pool resources are usually used unsustainably.
How can we use Common-Pool Resources Sustainably?
Sustainable resource use includes using resources at a rate which allos them to reproduce so that they do not become depleted. Using resources below their maximum sustainable yield can guarantee sustainability.
What is Market Failure?
Refers to the failure of the market to achieve allocative efficiency (there is either under or overallocation of resources).
What is an Externality?
Occurs when the actions of a consumer or producer gives rise to either negative or positive consequences affecting third parties. A divergence is created between either MPB and MSB or MPC and MSC.
What is the Socially Optimum Output?
The level of output that is best from society’s point of view. It is determined by the achievement of allocative efficiency where MSB = MSC.
What is Marginal Social Cost?
The costs to society of producing one more unit of good.
What is Marginal Social Benefit?
The benefit to society of producing one more unit of good.
How can we use Common-Pool Resources Sustainably?
Sustainable resource use includes using resources at a rate which allos them to reproduce so that they do not become depleted. Using resources below their maximum sustainable yield can guarantee sustainability.
What is Market Failure?
Refers to the failure of the market to achieve allocative efficiency (there is either under or overallocation of resources).
What is an Externality?
Occurs when the actions of a consumer or producer gives rise to either negative or positive consequences affecting third parties. A divergence is created between either MPB and MSB or MPC and MSC.
What is the Socially Optimum Output?
The level of output that is best from society’s point of view. It is determined by the achievement of allocative efficiency where MSB = MSC.
What is Marginal Social Cost?
The costs to society of producing one more unit of good.
What is Marginal Social Benefit?
The benefit to society of producing one more unit of good.
Explain the effect of a Negative Externality of Production in the Market
There is over-allocation of resources to the production of the good so that MSC > MPC and Qopt < Qm, therefore social cost is higher than social benefit.
How are Consumer and Producer Surplus affected by a Negative Externality of Production?
Consumer surplus: decreases
Producer surplus: decreases
(creation of welfare loss)
Explain the relationship between Negative Externalities of Production and Common-pool Resources
Negative externalities of production can show over-use of common-pool resources. E.g. a firm overuse of clean air, water and sea life on account of its dependence on fossil fuels which pollute the environment.
What policies can the government use to correct Negative Externalities of Production?
- Indirect Pigouvian taxes
- Carbon taxes
- Tradable permits
- Legislation and regulation
- Collective self-governance
- Education/awareness campaign
- International agreements
Explain the effect of a Negative Externality of Consumption in the Market
There is over-allocation of resources to the production of a good so that MPB > MSB and Qopt < Qm, therefore social cost is higher than social benefit.
What are Demerit Goods?
Goods that are considered undesirable for consumers but which are over-provided by the market. E.g. cigarettes.
Explain the relationship between Negative Externalities of Consumption and Common-pool Resources
Negative externalities of consumption can show over-use of common-pool resources. E.g. consumers can overuse clean air through air-travel, petrol vehicles, etc.
How are Consumer and Producer Surplus affected by a Negative Externality of Consumption?
Consumer surplus: decreases
Producer surplus: decreases
(creation of welfare loss)
What policies can the government use to correct Negative Externalities of Consumption?
- Indirect Pigouvian taxes
- Legislation and regulation
- Education/awareness campaign
- Nudges
Explain the effect of a Positive Externality of Production in the Market
There is under-allocation of resources to the production of a good so that MSC < MPC and Qopt > Qm, therefore social cost is lower than social benefit.
How are Consumer and Producer Surplus affected by a Positive Externality of Production?
Consumer surplus: increase
Producer surplus: increase
Creation of potential welfare gain
What policies can the government use to correct Positive Externalities of Production?
- Subsidies
* Direct government provision
Explain the effect of a Positive Externality of Consumption in the Market
There is under-allocation of resources to the production of a good so that MSB > MPB and Qopt > Qm, therefore social cost is lower than social benefit.
How are Consumer and Producer Surplus affected by a Positive Externality of Consumption?
Consumer surplus: increase
Producer surplus: increase
Creation of potential welfare gain
What are Merit Goods?
Goods that are held to be desirable to consumers but are underproduced by the market. E.g. education.
Why are Merit Goods underproduced?
- The good has positive externalities
- Low levels of income (cannot afford)
- Consumer ignorance
What policies can the government use to correct Positive Externalities of Consumption?
- Legislation and regulation
- Education/awareness campaign
- Nudges
- Government provision
- Subsidies
What are Public Goods?
Goods that are non-rivalrous and non-excludable. Examples include roads, street lighting, etc.
What is the Free-Rider Problem?
Occurs when people can enjoy the use of a good without paying for it and arises from non-excludability.
Why are Public Goods considered a Type of Market Failure?
They are considered market failure because, due to the free rider problem, private firms do not produce these goods, hence the market fails to allocate resources to their production.
What are examples of Excludable goods?
1) Private goods (e.g. computers, books, clothes)
2) Quasi-public goods (e.g. museums, cable TV)
What are examples of Non-excludable goods?
1) Common-pool Resources (e.g. forests, rivers, lakes)
2) Public goods (e.g. street lighting, roads)
What are examples of Rivalrous goods?
1) Private Goods (e.g. computers, books, clothes)
2) Common-pool Resources (e.g. forests, rivers, lakes)
What are examples of Non-rivalrous goods?
1) Quasi-public goods (e.g. museums, cable TV)
2) Public goods (e.g. street lighting, roads)
What policies can the government use to provide Public Goods?
1) Direct provision of goods
2) Contracting out the private sector
What is Asymmetric Information?
The situation in which buyers and sellers do not have equal access to information.
What are the Types of Asymmetric Information?
1) Moral Hazard
2) Adverse Selection
What is Adverse Selection?
The situation in which one party in a transaction has more information about the quality of the product being sold.
What policies can the government use to prevent Adverse Selection (sellers > buyers)?
- Regulation (quality standards)
- Provision of Information
- Licensure
What policies can the private sector use to prevent Adverse Selection (sellers > buyers)?
- Screening (searching info on the web)
* Signalling (warranties, service records available)
What policies can the government use to prevent Adverse Selection (sellers < buyers)?
Direct provision of services (e.g. healthcare).
What policies can the private sector use to prevent Adverse Selection (sellers < buyers)?
Policies (e.g. higher cost insurance if higher risk)
What is Moral Hazard?
Situation in which one party takes risks without facing the full costs of the risks (as these are borne by another party).
What policies can the private sector use to prevent Moral Hazard?
Out-of-pocket payments (in the case of insurance the buyer will have to pay part of the costs).
What policies can the government use to prevent Moral Hazard?
Regulation of financial institutions intended to oversee and prevent highly risky behavior.
Why does the Free Market result in an Unequal Distribution of Income?
The problem of income distribution arises because ownership of factors of production is highly unequal and the prices of factors of production determined in the market vary enormously.
What is Wealth?
Refers to the money or things of value that people own minus debts to banks or other financial institutions.
Why does the Free Market result in an Unequal Distribution of Wealth?
Generally, the higher the income the greater the possibilities for saving and accumulating wealth. Hence, as income is unequally distributed, so is wealth.
