Micro - types of market failure✔️ Flashcards
What is a Market Failure.
Market failure occurs when the free market fails to allocate resources at the socially optimum level, leading to inefficient outcomes and therefore a net welfare loss to society.
Negative Externalities
Negative externalities are costs that occur to third parties as a result of economic transactions between either consumers or producers. The two types of negative externalities include overconsumption and overproduction. The main reason externalities occur is due to consumers and producers self-interest.
What is Overconsumption
Rational consumers consume sugary drinks up to the point where the private marginal benefit of consuming a sugary drink is equal to private marginal cost. However, they do not consider the impact this consumption may have on society as a whole. For example, excessive consumption of sugary drinks can lead to health problems
What is Overproduction
Any factory that produces excessive pollution can be used as an example of overproduction e.g. car factories. This is because; the overproduction of cars can cause large amounts of pollution which then has negative third party effects on the environment as a whole. Furthermore, third parties that weren’t involved in the car production such as people suffering from asthma can also be harmed.
Positive Externalities
Positive externalities are benefits that occur to third parties as a result of separate economics transactions between consumers or producers. The two types of positive externalities include underproduction and under consumption.
What is Underconsumption
An example of a good/service that is under consumed is fruit. The consumption of fruit has been proven to reduce the risk of health issues such as heart disease. Therefore a person that eats the recommended intake of fruit is less likely to visit the doctor as often as much as someone who doesn’t thus saving the NHS money as well as giving doctors more time to treat other patients. Therefore, third party agents that weren’t involved in the initial economic transaction (the consumption of fruit) will benefit.
What is Overconsumption
One example of underproduction is green technology such as solar panels. The production of solar panels reduces the amount of non-renewable sources of energy being used such as coal. These types of energy are often harmful to the environment due to the fossil fuels they emit. Therefore, the production of solar panels is environmentally friendly which benefits third parties such as those that live in busy town centres that may suffer health issues as a result of the excessive inhalation of pollution.
Non Rival
This means that the consumption of a good/service by another individual does not reduce the amount of benefit derived from that good/service to other people. For example a person that is standing by a streetlight does not lose benefit from that street light if another person stands in the light also.
Non Excludable
The benefit derived from the good/service is unable to be excluded from certain individuals. For example, a person that does not pay taxes will still benefit from the armed services who protect their country. The armed services cannot refuse to protect certain individuals who do not pay their taxes.
