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Economics
Theme 1
1.3 Market Failure
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Created by
Freddie Grassi
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Cards (15)
What is the definition of market failure?
When the allocation of goods is
inefficient
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Name three types of market failure.
Externalities
,
public goods
,
information failure
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What is an external benefit?
Benefits received by
third parties
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What is an external cost?
Costs incurred by
third parties
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What is a social benefit?
Sum of
private
and
external benefits
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What is a social cost?
Sum of
private
and
external costs
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What does a negative externality in production diagram illustrate?
Socially optimum equilibrium
Private equilibrium
Under/over consumption
Welfare loss
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What does a positive externality in consumption diagram illustrate?
Socially optimum equilibrium
Private equilibrium
Under/over consumption
Welfare loss
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What are the two necessary conditions for public goods?
Non-excludability
and
non-rivalry
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What is the name for a good which displays only one condition?
Quasi-public good
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What is the free rider problem?
Individuals
benefit without paying for the good
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Are public goods under- or over-consumed in the free market? Why?
Under-consumed due to
free rider problem
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Why might governments choose not to provide public goods?
Due to
budget constraints
or
inefficiency
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What is information asymmetry?
When one party has
more
information
than another
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Why is information asymmetry a form of market failure?
It leads to
inefficient
market outcomes
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