Theme 1: Market Failure Flashcards
3 types of market failures
Externalities, under provision of public goods and information gaps.
Private benefit
the benefit received by the consumer of a good or service
Social benefit
Social benefits are private benefits plus external benefits.
Social optimum position
MSC = MSB and it is the point of maximum welfare
negative externalities
MSC>MPC of supply
deadweight welfare loss
The output where social costs > private benefits
positive externalities
MSB>MPB
welfare gain
the excess of social benefits over costs
How do indirect taxes correct market failure?
Reduce the quantity of demerit goods consumed through raising the price of the good or the firm internalises the cost.
How do subsidies correct market failure?
Encourage the consumption of merit goods
How does regulation correct market failure?
Bans could be enforced for the harmful good and reduce consumption or completely remove consumption. Bans are only useful when MSC > MPB.
How does providing the good directly correct market failure?
The government providing public goods corrects the under provision of something in the free market.
How does providing information correct market failure?
Consumers can make informed economic decisions.
How do property rights correct market failure?
This encourages innovation because entrepreneurs can create new ideas which are protected.
How do personal carbon allowances correct market failure?
Firms can pollute up to a certain amount and trade what they do not use.
Non-excludable
A characteristics of some goods where it is not possible to exclude someone from using a good.
Free rider problem
People who do not pay from the good still benefit.
Why are public goods underprovided
Difficult to measure value consumers get so hard to put price on
Features of a private good
Rival and excludable
quasi-public goods
A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an under allocation of resources. eg roads
symetric information
Both consumer and producer have perfect market information.
asymetric information
Unequal knowledge between consumers and producers.
principal-agent problem
a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him
