Microeconomics, Part 5- The Market Mechanism, Market Failure and Government Intervention in Markets Flashcards
Market failure definition:
Occurs when the free market, left alone, fails to deliver an efficient allocation of resources. The result is a loss of economic welfare. This results in economic inefficiency.
Missing market definition:
A situation in which there is no market because the functions of price have completely broken down. Complete market failure results in a missing market. Partial market failure is where a market exists but contributes to resource misallocation.
What are the main causes of market failure?
- Positive and negative externalities
- Merit and demerit goods
- Public goods
- Monopoly and other market imperfections
- Inequalities in the distribution of income and wealth
- Factor immobility and causing unemployment
- Imperfect information
Public good definition:
A good that possesses the characteristics of non-excludability, non-rivalry and non-rejectable in consumption
Non-excludability definition:
Once provided, no person can be excluded from benefiting
Non-rivalry definition:
Consumption of the good by one person does not reduce the amount available for consumption by others.
Quasi-public good definition:
A good that has some of the qualities of a public good but does not fully posses all three required characteristics
Private good definition:
A good that is excludable, rejectable and rival in consumption
Complete market failure definition:
Where the free market fails to produce a product at all. i.e. the case of a public good. If public goods were not provided by the government there would be market failure. This is because of the free rider problem
Free-rider definition:
A person or organisation which receives benefits that others have paid for without making any contribution themselves.
Free-market definition:
Market where the government does not intervene
Externalities definition:
Costs or benefits that spill over the third parties external to a market transaction
Positive externality definition:
A positive spillover effect to third parties of a market transaction; social benefits exceed private benefits
Negative externality definition:
A negative spillover effect to third parties of a market transaction; social costs exceed private costs
Marginal private cost definition:
The cost to an individual or firm of a market transaction
Marginal external cost:
The spillover cost to third parties of an economic transaction
Marginal social cost:
The full cost to society of an economic transaction, including private and external costs
What makes up marginal social cost?
Marginal private cost and marginal external cost
Marginal private benefit definition:
The benefit to an individual or firm of an economic transaction
Marginal external benefit definition:
The spillover benefit to third parties of an economic transaction
Marginal social benefit definition:
The full benefit of an economic transaction, including private and external benefits
What makes up marginal social benefit?
Marginal private benefit and marginal external benefit
Incidence of tax definition:
The proportion of the tax that is passed onto the consumer. If most of the tax is passed onto the consumer then the incidence of tax is said to be high. When demand is price inelastic, the incidence of tax tends to be high
