Market failure

• What is market failure?

  When the free market misallocates resources
• What happens to economic and social welfare during market failure?

  It is not maximized
• What is an externality?

  Cost or benefit to a third party
• What are the two types of externalities?

  Positive and negative externalities
• Why is it difficult to determine the monetary value of an externality?

  It involves subjective value judgments
• What is the result of imperfect information regarding merit and demerit goods?

  Over-provision of demerit goods and under-provision of merit goods
• What does geographical immobility of labor refer to?

  Obstacles preventing labor from moving areas
• What does occupational immobility of labor refer to?

  Obstacles preventing labor from changing use
• Why are public goods underprovided in a free market?

  Due to the free-rider problem
• What are the characteristics of public goods?

  Non-excludable and non-rival
• What is the free-rider problem?

  People benefit without paying for the good
• Why is it difficult to measure the value of public goods?

  Consumers undervalue benefits and producers overvalue
• How are public goods funded?

  Using tax revenue
• What is the difference between private goods and public goods?

  Private goods are rival and excludable
• What is the assumption about information in economic decisions?

  Consumers and producers have perfect information
• What does imperfect information lead to?

  Misallocation of resources
• What are private costs?

  Costs incurred by producers in production
• What is marginal private cost?

  Cost of producing one extra unit
• How are social costs calculated?

  Private costs plus external costs
• What is marginal social cost?

  Extra cost on society per extra unit consumed
• What are social benefits?

  Private benefits plus external benefits
• What is the social optimum position?

  Where MSC equals MSB
• What occurs at the market equilibrium with negative externalities?

  MSC is greater than MPC
• What is the area of deadweight welfare loss?

  Where social costs exceed private benefits
• What is the purpose of indirect taxes regarding negative externalities?

  To reduce consumption of demerit goods
• How do subsidies affect merit goods?

  They encourage consumption of merit goods
• What is the role of government in providing public goods?

  Estimate social benefit for output decisions
• What is the principal-agent problem?

  When agents act in their own interests
• What can improve labor market flexibility?

  More training opportunities
• How does housing affordability affect labor mobility?

  It enables easier movement for work
• What is the impact of trade union power on labor market flexibility?

  It can increase job security and flexibility
• What is the effect of excessive regulation on labor market flexibility?

  It limits flexibility
• What is the geographical immobility of labor?

  Obstacles preventing labor from moving areas
• What can improve geographical mobility of labor?

  Improving infrastructure
• How does training affect labor market flexibility?

  More skilled workforce increases flexibility
• What is the relationship between welfare payments and labor market flexibility?

  High welfare payments lower flexibility
• What is the impact of income tax rates on labor market flexibility?

  High rates lower flexibility
• How does the flexibility of the labor market affect the economy?

  It helps adjust to market demand changes
• What is the effect of imperfect market information?

  Leads to misallocation of resources
• What is asymmetric information?

  Unequal knowledge between consumers and producers