Topic 5 Flashcards
Market Failure Definition
Occurs whenever the market mechanism or price mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity.
Complete Market Failure Definition
Where the market simply does not exist, known as a missing market.
Partial Market Failure Definition
Where a market functions, but the wrong quantity of a good or service is produced.
Private Good Definition
A product that must be purchased to be consumed, consumption of an individual prevents another individual consuming it.
Public Good Definition
A commodity or service that is provided to all members of society without profit, either by the government or a private organisation
The Signalling Function
Price signal info that allows buyers and sellers in a market to plan and coordinate their economic activities. Prices fall and rise to reflect scarcities and surpluses. if prices rise due to increased demand this signals suppliers to expand production.
The Rationing Function
An increase in price gets rid of excess demand, the rising price reflects the strength of consumer preferences and consumers ability to pay. This function distributes scarce goods to consumers who value them highly.
The Incentive Function
Prices create incentives for people to alter their economic behavior. A higher price creates an incentive for firms to supply more because they believe higher profits can be made.
The Allocative Function
Opposite to rationing function, tries to direct resources between markets in which prices are too high and where excess supply.
Positive Externality Definition
A benefit enjoyed by a third party as a result of an economic transaction.
Negative Externality Definition
A cost that is suffered by a third party as a consequence of an economic transaction.
Excludable Definition
The owners can exercise the private property rights, preventing other people from using the good or consuming its benefits.
Rival Definition
If someone consumes the good, then no one else can consume it and gain its benefits.
Non-excludability Definition
The benefits derived from pure public goods cannot be confined solely to those who have paid for it.
Non-rivalry Definition
Consumption by one consumer does not restrict consumption by other consumers.
Free Rider Problem
Because public goods are non-excludable it is difficult to charge people for benefiting from a good or service once it is provided. This leads to under provision of a good and thus causes market failure.
Quasi-Public Goods Definition
A good which is not fully non rival and/or where it is possible to exclude people from consuming the product.
Semi Non-Excludable Definition
It is possible but often difficult or expensive to exclude non paying customers.
Technological Change
Made it easier for the government or local authorities to reduce the free rider problem. Roads used to be a pure public good where it was impractical to charge motorists for the use of the roads, due to technical change governments and local authorities have been able to use electronic pricing to charge motorists. Roads are a quasi-public good.
Public Bad Definition
Opposite of a public good, it provides dissatisfaction to people when consumed and therefor reduces economic welfare.
Social Benefit Definition
The total benefit of an activity including the external benefit as well as the private benefit resulting from a particular business activity.
Production Externality Definition
An externality generated in the course of producing a good or service.
Consumption Externality Definition
An externality generated in the course of consuming a good or service.
Merit Good Definition
A good, such as healthcare, for which social benefits of consumption consumption enjoyed by the community exceed the private benefits received by the consumer.
Merit Goods
Provided by both public and private sector, positive marginal cost supplying to extra users, limited in supply- potentially high oppurtunity cost, rival, excludable, rejectable by those unwilling to pay for the good or service.
Public Goods
Normally funded and provided by the government, collective consumption- provide to one and you provide to all, largely unconstrained in supply, non-rival in consumption, non-excludable, non-rejectable- usually funded by general taxes.
Why does the government provide merit goods and services?
To encourage consumption so positive externalities of merit goods can be achieved. To overcome information failures linked to merit goods. On grounds of equity- government believes that consumption should not be based solely on the grounds of ability to pay for a good or service.
Demerit Good Definition
A good, such as tobacco, for which the social costs of consumption exceed the private costs.
