Unit 2: Microeconomics - Market Failure Flashcards
Market Failure
Failure of the market to allocate its resources effectively
Overallocation
Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction
Underallocation
Occurs when too few resources are allocated to the production of a good, relative to what is socially most desirable, resulting in underallocation
Different views of Market Failure
Externalities
Lack of public good
Common access resources and threat to sustainability
Externality
A cost or benefit that arises from production and falls on a third party
4 Types of Externalities
(-) externality of production
(-) externality of consumption
(+) externality of production
(+) externality of consumption
Social Optimum
What is best from societies point of view. Determined by the achievement of allocative effficency
Negative externalities of production
A negative externality caused by production activities, leading to a situation where marginal social costs are greater than marginal private costs
EX/ Congestion, Pollution, Carbon Emissions
Negative externality of production, therefore we deal with the ___ curve
Supply
Negative externality of production is the result of ____ of resources in the market to the production of the good or service
overallocation
Which way does the ___ curve shift when there is a negative externality of production?
The supply curve shifts left in order to decrease the supply
Ways the government can correct negative externalities of production
Government intervention Market based policies - taxes - imposing taxes on each unit of output this increasing the price of production and decreasing the supply - tradable permits
Advantages and disadvantages of market based taxes and permits (in regards to NEGATIVE externalities of PRODUCTION)
ADVANTAGES:
- Internalize external costs
- Incentives producers to find cleaner technologies
DISADVANTAGES:
- practicality
- gov’ts much oversee permit trades therefore costing the government
Advantages and disadvantages of government regulations (in regards to NEGATIVE externalities of PRODUCTION)
ADVANTAGES:
- simpler
- easier to implement
DISADVANTAGES:
- externality is not absorbed by producer
- no market based incentives, therefore can’t reduce the size of the externality
Negative externalities of consumption
A negative externality caused by consumption activities, leading to a situation where MSB
Negative externality of consumption, therefore we deal with the ____ curve
Demand, which shifts the demand curve DOWN
Demerit goods
Goods that are considered to be undesirable for society and are over provided by the market. Reasons for overprovision may be ignorant of harmful effects
Solutions or attempts at fixing negative externalities of consumption
- Gov't regulations Limit or ban consumption - Advertisement Educate people about the harms of G/S - Market-based policies Impose an indirect tax on G/S
Advantages and disadvantages of government regulations (in regards to NEGATIVE externalities of CONSUMPTION)
ADVANTAGES:
- Direct involvement in limiting or banning G/S
DISADVANTAGES:
- Loss of tax revenue
- could effect large corporations (job loss)
Advantages and disadvantages of advertising (in regards to NEGATIVE externalities of CONSUMPTION)
ADVANTAGES: - Simple - Educates people - controlled message DISADVANTAGES: - costs money - may not be effective enough to reduce externality
Advantages and disadvantages of market-based policies (in regards to NEGATIVE externalities of CONSUMPTION)
ADVANTAGES:
- Indirect taxes preferred measure
- Internalize externality
DISADVANTAGES:
- Difficult to asses who and what is effected
- habit forming good and service often elastic demand
