The meaning of market failure Flashcards
define market failure
when the price mechanism leads to a misallocation of resources
define complete market failure
when there is a missing market and the market does not supply the G/S at all.
define partial market failure
when the good does exist but doesn’t work perfectly e.g. wrong quantity or the wrong price
in partial market failure was happens tor resources
resources are misallocated
State the 6 main cause if market failure
- Externalities
- Public goods
- Tradegy of the commons
- Merit & demerit goods
- Market imperfections
- Unequal distribution of income and wealth
define externalities
the cost or benefit a third party receives from an economic transaction outside of the market mechanism
define positive externalities
positive externalities - Benefits which affect third parties outside the price mechanism. they have a positive effect on other people
define negative externalities
negative externalities - costs which affect third-partiesoutsidethe price mechanism. they have. negative effect on other people
define negative consumption externalities
costs that effect third parties as a result of the consumption of a good
define negative production externalities
costs that effect third parties as a result of the production of a good
define positive production externalities
benefits which affect third parities as a result of the production of a good - producer created
define positive consumption externalities
benefits which affect third parities as a result of the consumption of a good - consumer created
why may externalities lead to market failure
there may be an underconsumption or overconsumption of a G/S
what are public goods
public goods are non-excludable (t’s very difficult to stop other people from consuming the good) and non-rival (Lots of people can use these goods at the same time)
why may public goods lead to market failure
The free rider problem. This describes how consumers wait for other consumer to buy the public good and get a free ride (get to use it for free) and so consumers never actually demands the public good and producers will not want to supply public goods because everyone will just use it for free and they cannot make a profit = market failure = public goods are underproduced/ underporvided
what is the tragedy of commons
The tragedy of the commons occurs when common pool resources (natural resources like forests and fish in the sea, clean air, which are not owned privately) are used by either the producer or consumer in a way that is not sustainable
why may the tragedy of commons lead to market failure
no private ownership over these resources as it is costly and inefficient to find ways to exclude other producers = may overcomsume above the sustainable threshold
define information gaps or imperfect information
when consumers or producers lack the information needed to make an informed decision
state the three main types of market imperfections
- imperfect information or information gaps
- monopoly power
- factors mobility
how may imperfect information or information gaps lead to market failure
consumer and producers make bad, uninformed decisions.
define monopoly power
thepowera firm has to set prices - they are aprice maker.
state how monopoly power can lead to market failure
causes market failures when a monopolist charges higher prices, which may lead to under consumption and reduced output, resulting in a partial market failure
define factor immobility
when a factor of production is immobile (can’t move)
how may factor immobility lead to market failure
If they are immobile and cannot be easily reallocated to match a change in demand, markets will not clear, resulting in the misallocation of resources and partial market failure
define wealth
the sum or stock of all your assets added up
how may factor an unequal distribution of income and wealth lead to market failure
When wealth or income is not distributed in society, some consumers may not be able to afford to purchase goods and services = may turn to crime, others may fall ill being unable to eat health food, life expectancy and living standards may fall e.t.c
- increased negative externalities such as social unrest
define income
- measure the flow of money a person or economy receives each year
define merit goods
goods or services that are beneficial to consumer and society but the free market does not provide enough of them
define demerit goods
goods which have harmful impacts on consumers or society
how may merit or demerit goods lad to market failure
due to information gaps = market failure
- merit goods are under-consumed
- demerit goods are over-consumed
