Topic 17-Market Failure And Public Goods Flashcards
Market failure
Occurs when free markets and the forces of supply and demand lead to an inefficient allocation of resources and fails to provide a good which consumers want
Public good
Goods that involve a large element of collective consumption e.g national defence system, criminal justice system
-non-rivalry
Non-rivalry
Consumption by one individual doesn’t limit consumption for others
Private goods
A product that must be purchased in order to be consumed and who’s consumption prevents other individuals from consuming it
Market fails because:
- free rider problem
- valuation problem
Problem that once a product is provided it is impossible to prevent people from using it and therefore impossible to charge for it
Difficulty of putting prices on goods
Difference between public goods and private goods
Public goods is a good that could be benefited by the public e.g street light and defence
Private goods are excludable it is possible to prevent everyone from consuming the product and rivalrous means consumption by one person limits consumption by others
Reasons why the free market may fail
- immobility of labour
- public goods
- externalities: negative and positive
- price instability in markets
- asymmetric information
- government
Two characteristics of public goods
- non-rivalrous: means that consumption by one person doesn’t limit consumption by others
- non-excludability: means that if a good is available for one person, then it is available for everyone
Policy to correct market failure and other ways of providing public goods
Disadvantage of this
- For the government to provide public goods financed through taxation
- Politicians will determine the amount of resources allocated to these public goods without direct reference to electorate
- agencies appointed by the gov or by charities and voluntary organisations
