Micro: Market Failure Flashcards
Market failure
Occurs when the market mechanism has an inefficient allocation of resources
and when the operation of market forces leads to an allocatively inefficient outcome
Complete market failure
A market fails to function at all and a missing market results
Partial market failure
A market does function but it delivers the wrong quantity of a good or service which results in resource misallocation
Missing market
The absence of a market for a good or service due to public goods or externalities
Associated with the difficulties that the free market has in providing public goods
Government failure
When the government intervention makes the allocation of resources worse
Privatisation advantages
Revenue raising-governments sell off state owned assets in order to make short term revenue
Reducing public spending and government borrowing- public din’t need to pay taxes for the company, the private owner does it
Promotes competition
Promotes efficiency
Popular capitalism
Privatisation disadvantages
Monopoly abuse
Regulation of monopolies
Government miss out on valuable dividends
Types of market failure
Inequality Monopoly Public goods Demerit and merit goods Information failure Inefficiency Unstable markets Missing markets
Allocative efficiency
P=MC
Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets
Productive efficiency
The level of output at which average costs of production are minimisedd
AC lowest
Public goods
Non excludable
Non rival
Not provided by private sector as non profitable
Therefore gov have to decide on how much to supply and who to supply to
Free rider problem- non excludable- can’t stop people who haven’t paid from benefiting from it
Leads to under provision of a good or service
