Topic 3 - Market Failure Flashcards
What is price discrimination?
Where a firm charges different prices to different consumers for an identical G&S with no difference in costs of production.
Conditions necessary for price discrimination
Price making ability
Information to separate the market - identify consumers with price elastic ability
Prevent re-sale (market seepage)
What is 1st degree price discrimination
consumer surplus turned into monopoly profit.
Some people will be prepared to pay different prices
What is 2nd degree price discrimination
Initially they will price to profit maximise. Then they will decrease prices last minute to gain as much revenue. This occurs with services that have limited capacity.
What is 3rd degree price discrimination
They have to charge different prices in different markets because there may not be any demand for certain prices.
Pros of Price discrimination
Dynamic efficiency
Economies of Scale
Some consumer benefit
Cross subsidisationC
Cons of Price Discrimination
Allocative inefficiency - charging prices beyond marginal costs.
Inequalities - 3rd degree
Anti-competitive pricing - 3rd degree - if prices go down they will drive out competitors.
What is market failure
(exam definition)
Market failure occurs when the production and/or use of G/S by the market is not efficient. It is when a market results in the misallocation of resources.
Causes of market failure
Negative externalities - consumers will ignore affects on third parties
Positive externalities
De merit goods - we don’t know how good/bad
Merit goods
Public goods - Free rider problems + profit motivated firms
Common acces resource - overconsumption (Tragedy of the commons)
Income inequalities - inequality on someones opinion
Monopoly power - one dominate sell & high barriers to entry
What is the free market
where the government lets the forces of supply and demand set price, quantity and hence overall resource allocation.
This means that the government doesn’t intervene in the market.
America is the freest market in the world.
Partial market failure
it is when a market exists, but the resource allocation is not socially optimal.
What are private costs, external costs, social costs
private - payments made directly by producers for the production of the G/S.
External costs are paid indirectly by third party and come about due to the usage of G/S
What are private benefits, external benefits, and social benefits
private - picked up directly from the consumption of the G/S
external - directly from third parties and come about due to the usage of G/s
Social - total benefits to society, SB = PB + EB.
What is an externality
the consequence of an economic activity that is experienced by 3rd parties. It can be positive or negative.
Negative externalities in production
this arises when a firm fails to take into account the wider negative impcts of their activities on society.
In this situation, social costs exceed the private costs of production.
Positive externalities in production
is when the actions of firms have a wider benefit to society. When their are positive externalities, social benefits exceed private benefits.
MSB = MPB + MEB
positve externalities of consumption
occur when the actions of an individual consumer have a position knock on effect and impact on others and society. Because there is a benefit to other from your consumption, the social marginal benefit is greater than private marginal benefit
If positive: MSB > MPB
If negative: MPB > MSB
Negative externalities
is when consumers are consuming too much of a producers. The benefit to the individual exceed the benefit to society
These are associated with information failure, since consumers are not aware of the LR implications of consuming the good and they are usually overprovided.
Merit goods
goods deemed more beneficial to consumers than they realise
positive externalities in consumption
imperfect information
e.g. healthcare, education, exercise
Underconsumed/Produces
Demerit goods
goods deemed more harmful to consumers than they realise
Imperfect information -> info. failure
Negative externalities in consumption
e.g cigarettes, Alcohol, Gambling
Over consumed/produced
Private goods
goods which are excludable and rivalrous in consumption.
Excludibility: where it is possible exclude access to G/S, by price rivallrous where consumption of G/S by one person will prevent others from engaging it as it will run out of supply.
A private good is one which is excludable preventing access to it by price for the newspapers. It is also a non-rivalrous product since there will be a limited supply of the demand.
Public good
Goods which are non-excludable and non-rivalrous in consumption leading to a missing market if unprovidable.
Non-excludable: where it is not possible to provide G/S to one person without it therby being available for others to enjoy, leading to a free rider problem.
Non-rivalry: where consumption of a G&S doesn’t prevent others from enjoying it. e.g. lights in the street.
Information failure
Imperfect information -> prevent rationing
Lack of information:
- Merit goods - not enough info - underconsumption
- De-merit goods - not enough info - overconsumption.
Assymetric information
info does exist but not shared equally between the market
-> labour markets -> employer doesn’t have info about a worker so they may make an irrational decision
-> second hand markets -> car market -> seller has all the information but might not give it to the buyer -> so irrational
-> insurance markets -> cars -> car owners knows what type of driver they are so the companies give inaccurate price
Common access resources
Natural resources over which no private ownership has been established.
Lack of private ownership leads to the tragedy of the commons
All done one self - interest & resource depletion
Self interest is to exploit these resources causes the resource depletion
Tragedy of the commons is when a lack of propety rights leads to people over-using and exhausting common resources.
Demerit goods (exam defenition)
a good which generates negative externalities in consumption.
a good for which the social optimum level of consumption is less than the private level of consumption.
a good which society judges as undesirable.
Perfect/symmetric information
occurs when both parties have the same knowledge in an economic transaction.
We assume that all decision-maker are rational to maximise their utility.
Information failure/ imperfect information
occurs when we have inaccurate, incomplete, uncertain or misunderstood data and so make potentially wrong choices.
Reasons for information failure
suppliers don’t provide enough information about their goods and services.
consumers choose to ignore the information provided
consumers lack specific specialist knowledge
deliberate misinformation/exaggeration.
