Theme 1 - Introduction to Markets and Market Failure (1.3 - Market Failure) Flashcards
What is market failure? [1]
Ref - 1.3.1 (Types of Market Failure)
Price mechanism fails to deliver efficiency, causing a misallocation of resources. [1]
State 4 of the possible market failures that can occur. [4]
Ref - 1.3.1 (Types of Market Failure)
Positive/Negative Externalities [1]
Information Gaps [1]
Missing Markets [1]
Factor (e.g. Labour) immobility. [1]
State and describe the 2 types of externalities which can occur. [4]
Ref - 1.3.2 (Externalities)
Negative externality [1] - These are negative effects on a third party [1]
Positive externality [1] - These are positive effects on a third party. [1]
Which 2 factors will economic agents consider when making a decision, relating to externalities? [2]
Ref - 1.3.2 (Externalities)
Private costs [1]
Private benefits [1]
Give an example of a private cost and private benefit. [2]
Ref - 1.3.2 (Externalities)
Private benefit - (Better healthcare) [1]
Private cost - (Cost of hospital bill) [1]
Describe the features of an externality diagram. [2]
Ref - 1.3.2 (Externalities)
MPB/MSB on the demand curve. [1]
MPC/MSC on the supply curve. [1]
“A negative externality diagram has a….. [2]
Ref - 1.3.2 (Externalities)
….Welfare loss triangle” [1]
….Social optimum quantity below market equilibrium. [1]
“A positive externality diagram has a…… [2]
Ref - 1.3.2 (Externalities)
….welfare gain triangle.” [1]
Social optimum quantity above the market equilibrium.” [1]
Explain how a negative externality can cause market failure. [4]
Ref - 1.3.2 - Externalities
- When only private costs (MPC) is considered, the output level is at Qe. [1]
- This means there is an overproduction of negative externalities. [1]
- Shown by the negative welfare triangle. [1]
- Therefore causing market failure due to overproduction of negative externalities. [1]
What are public goods? [1]
Ref - 1.3.3. - Public Goods
A good with non-rivalry and non-excludability characteristics. [1]
What are private goods? [1]
Ref - 1.3.3. - Public Goods
A good with rival and excludability characteristics. [1]
Give an example of a public and a private good. [2]
Ref - 1.3.3. - Public Goods
Public good - Street lights [1]
Private good - Lamborghini [1]
What is the name given to a good which possesses some characteristics of a public good? [1]
Ref - 1.3.3. - Public Goods
Quasi-public good [1]
Describe the free-rider problem. [3]
Ref - 1.3.3. - Public Goods
Once a public good is provided [1], it is impossible to prevent economic agents who haven’t paid for it [1], consuming it. [1]
“For markets to work effectively, there is a need for…..” [1]
Ref - 1.3.4 - Information Gaps
“…..perfect information for producers and consumers.” (Symmetric information) [1]