Policies to deal with market failure Flashcards
Why does market failure happen?
Its a situation in which the allocation of resources (goods and services) through the free market isn’t efficient.
What are the four reasons for market failures occurring?
Externalities
Public goods
Information asymmetries
Monopolies
What can the inefficiency of market failure lead to?
Loss of economic and social welfare
What are externalities?
Costs or benefits which fall on third parties that aren’t accounted for in the price. Negative externalities provide costs such as pollution whereas positive externalities provide benefits such as education.
why do markets fail due to public goods?
Goods that are non-excludable and non-rivalrous, therefore are available to everyone and a persons uses cant diminish another persons ie street lights
What is information asymmetry
When one person has more knowledge/information than the other in a business transaction. i.e. a car salesman knowing more about a cars condition than the buyer.
What policies can be implemented in attempt to deal with market failure?
Regulation
Taxation and subsidies
Public ownership
Education and information
Competition policy
How is regulation used to deal with market failure?
Governments may impose certain rules which will help to control business activity and correct market failures. For example governments may set emission standards in order to combat pollution.
How may taxation and subsidies reduce market failure?
Taxes can be placed on goods or services causing negative externalities making them more expensive and furtherly reducing consumption. To encourage production, positive externalities can be caused from subsidies.
How may public ownership be used to combat market failure?
In the case of markets failing due to public goods the government may choose to provide these itself or regulate provision if its provided by a private firm.
How may education and information be used to combat market failures?
Governments may choose to provide information to consumers about the nature and risks of products in order to reduce asymmetry. Offering training and cheaper further education will also help to improve labour productivity.
How can the competition policy reduce market failure?
By regulation monopolies, promoting competition and preventing merger activity which usually results in market dominance.
What evaluations are there for policies?
Effectiveness depends on implementation
Policies usually have long term effects
Different policies have different effects/impacts on stakeholders
