Theme 1: Market Failure Flashcards
What is the definition of market failure?
When the price mechanism leads to a misallocation of resources
Name 3 types of market failure.
Externalities, public goods, information gaps
What is an external benefit?
A benefit to 3rd parties outside the transaction
What is an external cost?
A cost to a 3rd party outside the transaction
What is a social benefit?
The total benefit to private individuals and 3rd parties
What is a social cost?
The total cost to private individuals and 3rd parties
What is the name for a good that only displays one feature?
Quasi-public goods
What is non-excludability?
Where you can’t stop someone from consuming it once its been provided
What is non-rivalry?
One person’s consumption doesn’t affect another’s
What is the free-rider problem?
Where consumers can consume public goods for free because they are non excludable
Are public goods under or over consumed in the free market and why?
Underconsumed because no one wants to pay for them (free-rider)
Give a reason why governments may choose not to provide public goods
Expense, unintended consequences
What is information asymmetry?
Where one party knows more them another in a transaction
What are merit goods?
Goods which would be demanded more if consumers had full information
What are demerit goods?
Goods which would be demanded less if consumers had full information
