The Market Mechanism, Market Failure and Government Intervention Flashcards
Define Market Failure
Where resources are inefficiently allocated due to imperfections in the working of the market mechanism- there is a misallocation of resources.
When does complete market failure occur?
When the market simply does not supply products at all- leads to “missing markets”
When does partial market failure occur?
When the market does actually function but it produces either the wrong quantity of a product or at the wrong price.
What are private goods and services?
Excludable, rival and rejectable
How are private goods excludable?
Consumers of private goods can be excluded from consuming if they are not willing and able to pay. Because owners of a private good are able to exercise private property rights.
What are property rights?
The legally recognised ownership of an economic resource giving the owner the exclusive right to determine how the resource is used. Owners of a private good are able to enforce these rights e.g. no entry to a football game without a ticket.
How are private goods rival in consumption?
One person’s consumption reduces the amount left for others to consume.
How are private goods rejectable?
Private goods can be rejected if you don’t want to consume them.
Why will the private sector supply private goods?
Because they can exercise their private property right and charge consumers and make a profit.
What are public goods and services?
Non-excludable, Non-rival and Non-rejectable.
How are public goods non-excludable?
- The benefits of pure public goods are not confined to those who have paid for it because there are no enforceable property rights. e.g. flood defences as non-payers enjoy the benefits of consumption at no financial cost.
- Although a supplier could exclude individuals if they did not pay - they could enforce property rights which may not be cost effective. e.g. putting fences on the beach and making people pay to go on a beach
How are public goods non-rival in consumption?
Consumption of a pure public good by one person does not reduce the availability of the good to others. e.g. defence
How are public goods non-rejectable?
If a pure public good is provided, we cannot avoid it whether we want it or not.
What is the Free rider problem (excludability) ?
As pure public goods are non-excludable consumers have an incentive not to contribute because they will receive the benefit of the good whether they contribute to it or not. e.g. TV license dodgers
What is the free rider problem (rivalry)?
Consumers know that the same amount will be available to them as everyone else whether they pay or not. So everyone will wait for someone else to pay, knowing they will receive the benefit.
Do private firms provide pure public goods?
No, due to the free rider problem private firms will not be able to make any profit.
Who normally provides pure public goods?
The government on the grounds of equity, and financed through general taxation or other forms of charge e.g. TV license fee.
What are some examples of pure public goods?
- National defence systems
- Lighthouse protection
- Street lighting
- Firework displays
- Flood defences
What are Quasi-public goods?
Products that are public in nature but exhibit some feature of excludability or rival depending on circumstances.
What some examples of a quasi public good?
A public good may become congested at peak times making it rival (roads) or a goof could be made excludable through the use of technology (subscription TV)
- Parks
-Police Force protection (rival)
- Beaches
Why does the state provide public goods?
- to correct for market failure as without them there would be missing markets
- on the grounds of equity as a government is out to maximise the welfare of its people
- on the grounds of efficiency as it could be easier to provide the good collectively and could have lower average costs of production.
When does the state not provide public goods?
When the good is quasi-public due to excludability as there is an incentive for the private sector as they can make profit.
Where has technology made a private good more public?
In the music industry where music was previously sold with physical CDs and is now sold on streaming sites for basically free so many artists give there music away for free because it is more cost effective. Led to increase in live music.
What are Public Bads (excludability)?
Goods from which no one is excluded from the disbenefits because of a lack of allocated property rights (no one owns the atmosphere) so the polluter free rides by passing on the cost of their pollution onto other people.
What are public bads (rivalry)?
The amount of disbenefit one person receives does not reduce the amount of disbenefit any other person receives.
What are negative externalities (external costs)?
The external costs that are imposed on a third party by an economic activity
What are positive externalities (external benefits)?
When an activity results in a benefit accruing to a third party.
What can positive and negative externalities be seen as?
A type of public good and a public bad.
How are externalities similar to public goods?
They are both non-excludable and non-rival.
