1.3 Market Failure

    Cards (15)

    • What is the definition of market failure?
      When the allocation of goods is inefficient
    • Name three types of market failure.
      Externalities, public goods, information failure
    • What is an external benefit?
      Benefits received by third parties
    • What is an external cost?
      Costs incurred by third parties
    • What is a social benefit?
      Sum of private and external benefits
    • What is a social cost?
      Sum of private and external costs
    • What does a negative externality in production diagram illustrate?
      • Socially optimum equilibrium
      • Private equilibrium
      • Under/over consumption
      • Welfare loss
    • What does a positive externality in consumption diagram illustrate?
      • Socially optimum equilibrium
      • Private equilibrium
      • Under/over consumption
      • Welfare loss
    • What are the two necessary conditions for public goods?
      Non-excludability and non-rivalry
    • What is the name for a good which displays only one condition?
      Quasi-public good
    • What is the free rider problem?
      Individuals benefit without paying for the good
    • Are public goods under- or over-consumed in the free market? Why?
      Under-consumed due to free rider problem
    • Why might governments choose not to provide public goods?
      Due to budget constraints or inefficiency
    • What is information asymmetry?
      When one party has more information than another
    • Why is information asymmetry a form of market failure?
      It leads to inefficient market outcomes
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