Types Of Market Failure Flashcards
The 5 main types of Market failure
(miss allocation of resources)
1)Merit Good-people
As:people underestimate the benefits of the Good
2)De-Merit Good-People
As:people underestimate the costs of the Good
3)postive externalities
As:gives benefit to third party
4)Negative externalities
As:Imposes a cost On a third party
5)Monopoly power
As:the firm controls the market/can set higher prices
3 extra types of market failure(for extra good knowledge)
1)Information failure
2)Unequal distribution in resources
3)Moral hazard-wanting for others to take a risk to then change stuff
Explanation for why Merit goods are a type of Market failure(chain of reasoning)
Under consumed Due to Imperfect information about its benefits.
THEREFORE THERE IS INFO failure meaning there is a missloacation of resources
Explanation for How Positive Externatlies are a type of Market failure(chain of reasoning)
Firms or consumers do not think about/do not care about the benefit to society /are only focused on self interest,.
this leads: to an under consumption or under provision of the market good
which results in a misallocation of resources.
How do merit and de-merit goods lead to market failure?
Imperfect information (information failure or asymmetric information)
this leads:buyers to, consume below(merit) or above(de-Merit) the social optimum (what society wants)
Leading to: less of the positive/negatve externality being given off
resulting in: a misallocation of resources
How can common access resources lead to/be a type of of market failure?
Tragedy of the commons:
-private produces act upon their own self interest/
-exploit common access resources
which leads to: depletion of the resources
giving a negative externality off (loss of income)
Leads to:misallocation of resources
How do negative externalities lead to market failure?
The market will allocate resources at the private optimum(what selfish people want)
however: society would like to operate at the social optimum
Instead: we focus on self interest and ignore society’s cost/benefit
which leads:to a misallocation of resources
What is COMMON ACCES RESOURCES
Resources that aren’t owned by anyone
-Don’t have a price
-available to everyone(non rival or excludable)
Examples of common access resources
Seas/forest/atmosphere/public land
(basically nature)
What is the tragedy of the Commons
An individual/firm consumes a resource
At the expense of society
How does immobility of factors of Production lead to market failure(types of market failure)
Resource Misallocation:
When factors of production are immobile they cannot easily move to where they are most needed/where they are most productive.
This can result in resources being allocated inefficiently,
