1.3 Market Failure

    Cards (27)

    • What is market failure?
      Market failure occurs when the market fails to allocate scarce resources efficiently, causing a loss in social welfare.
    • What are the three main types of market failure?
      • Externalities
      • Under-provision of public goods
      • Information gaps
    • What is an externality?
      An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
    • How do externalities affect resource allocation?
      Externalities lead to the over or under-production of goods, meaning resources aren’t allocated efficiently.
    • Give an example of a negative externality.
      Cars and cigarettes have negative externalities.
    • Give an example of a positive externality.
      Education and healthcare have positive externalities.
    • What are public goods?
      Public goods are non-rivalry and non-excludable, meaning they are underprovided by the private sector due to the free-rider problem.
    • What is an example of a public good?
      Streetlights are an example of a public good.
    • What is the free-rider problem?
      The free-rider problem occurs when individuals cannot be charged for the provision of a non-excludable good, allowing them to benefit without paying.
    • Why won't private sector producers provide public goods?
      Private sector producers will not provide public goods because they cannot be sure of making a profit due to the non-excludability of public goods.
    • What is symmetric information?
      Symmetric information occurs where buyers and sellers have potential access to the same information, which is considered perfect information.
    • What is asymmetric information?
      Asymmetric information is when one party has superior knowledge compared to another, usually where the seller has more information than the buyer.
    • How does advertising contribute to information gaps?
      Advertising can lead to information gaps as it is designed to change consumer attitudes and may exaggerate the benefits of a product.
    • What are the consequences of information gaps in the market?
      Information gaps lead to a misallocation of resources because people do not buy things that maximize their welfare.
    • What is a merit good?
      A merit good is a good with external benefits, where the benefit to society is greater than the benefit to the individual.
    • What is a demerit good?
      A demerit good is a good with external costs, where the cost to society is greater than the cost to the individual.
    • What are the types of government intervention to address externalities?
      • Indirect taxes and subsidies
      • Tradable pollution permits
      • Provision of the good
      • Provision of information
      • Regulation
    • What is the role of indirect taxes in addressing negative externalities?
      Indirect taxes can be put on goods with negative externalities to help internalize the externalities, moving production closer to the social optimum position.
    • What are tradable pollution permits?
      Tradable pollution permits allow firms to produce up to a certain amount of pollution and can be traded among firms, giving them choice while reducing total pollution levels.
    • Why might the government provide public goods through taxation?
      The government may provide public goods through taxation when social benefits are very high.
    • How can the government provide information to address externalities?
      The government can provide information to help people make informed decisions and acknowledge external costs associated with certain activities.
    • What is the impact of regulation on goods with negative externalities?
      Regulation could limit the consumption of goods with negative externalities, such as banning advertising of smoking.
    • What are the two key characteristics of public goods?
      Public goods are non-rivalry and non-excludable.
    • Why are there very few examples of pure public goods?
      There are very few examples of pure public goods because they are both non-rivalry and non-excludable.
    • What is the relationship between information gaps and market failure?
      Information gaps lead to market failure as there is a misallocation of resources due to consumers not making informed decisions.
    • What are some examples of information gaps?
      Examples of information gaps include drugs, pensions, and financial services.
    • What is moral hazard in the context of information gaps?
      Moral hazard occurs when suppliers have more information than consumers and abuse their customers for their own benefit.