Market Failure 1.3

• What is market failure?


  Where the market mechanism doesn't result in socially optimum quantity or price
• Name 3 types of market failure


  Information failure, externalities, public goods
• What is an external benefit?


  A benefit to a third party outside the transaction
• What is an external cost?


  A cost to a third part outside the transaction
• What is a social benefit?


  The total benefit to private individuals and third parties: Private benefit plus External benefit
• What is a social cost?


  The total cost to private individuals and third parties: Private cost plus External cost
• On a negative production externality diagram, how do you find socially optimum equilibrium?


  Where MB (MSB) meets MSC
• On a negative production externality diagram, how do you find private equilibrium?


  Where MB (MSB) meets MPC
• On a negative production externality diagram, how do you find Under/over consumption in a private market?


  Overconsumption - the difference between the quantity at social equilibrium and at private equilibrium
• On a positive consumption externality diagram, how do you find social equilibrium?

  Where MC (MSC) meets MSB
• On a positive consumption externality diagram, how do you find private equilibrium?

  Where MC (MSC) meets MPB
• On a positive consumption externality diagram, how do you find under/over consumption in a private market?


  Underconsumption, the difference between the quantity at social equilibrium and at private equilibrium
• What are the two features of public goods?


  Non-excludability and Non-rivalry
• What is the name for a good which displays only one feature?

  Quasi-public goods
• What is non-excludability?


  You can't stop someone consuming it once it has been provided
• What is non-rivalry?


  One person's consumption does not affect another's
• What is the free rider problem?


  where consumers can consume good without paying for it because it is non-excludable
• Are public goods under- or over-consumed in the free market and why?


  Underconsumed because no-one wants to pay for them; they all want to free-ride on someone else's purchase
• Give a reason why governments may choose not to provide public goods


  Expense, adverse consequences, crowding out, government inefficiency
• Give an alternative to full state provision

  Subsidisation, public-private partnerships
• What is information asymmetry?


  Where one party in a transaction knows more than another
• Why is information assymetry a form of market failure?


  It can lead to a suboptimal level of output
• What is adverse selection?


  Where infomation assymetry leads to a narrower market
• What is moral hazard?


  Where one party changes their behaviour after a transaction
• How can independent reviews help moral hazard?


  People are less likely to change their behaviour if they know it may affect their future transactions
• What are the disadvantages of independent reviews?


  They can be faked or sabbotaged.
• What are merit goods? (Edexcel)


  Goods which would be demanded more if consumers had full information
• What are demerit goods? (Edexcel)


  Goods which would be demanded less if consumers had full information