Market Faliure and Governemnt intervention

Created by

Jamal

Cards (29)

What are the 3 types of market faliure
Negative externalities
posotive externalities
Public goods
Information gaps
Market faliure
When the price mechanism leads to a misallocation of recources
Negative externality
The cost to third parties outside of the transaction
Negative consumption externality
The cost to third parties outside of the transaction as a result of someone consuming a good
Negative production externality
The cost to third parites outside of the transaction as a result of someone producing a good
Private costs
The cost of producing or consuming a good
Private benefits
The benefits of producing or consuming a good
Social costs
The cost expirienced by society
Social beneift
The benefit expirienced by society
What is the formula for social costs?
Social cost = Private costs + external costs
What is the formula for social benefit?
Social benifit = private benefits + external benefits
What is the equation for Net benefit
Net benefit = social benefit - social cost
Welfare loss
The amount of welfare society loses out on as a result of negative externalities
Positive externality
The benefit to third parites outisde of the transaction
Positive consumption externality
The benefit to third parties outside of the transaction as a result of the consumption of a good
Positive production externality
The benefit to third parties outside of the transaction as a result of the production of a good
Public good  
A good that is non-rivalrous and non-excludable
Non-excludable  
When it is not possible to prevent a non-paying customer from using the good
Non-rivalrous  
When the consumption of a good by one person doesn't diminish the benefit from another persons consumption
Free rider problem 
When a person can consume a good without paying for it as the benefits cannot be confined to just one person
Governemnt and state provisions 
When the governemnt organise the provision of a good or service and fund it using tax revenue
Government and state provison organisation
The governemnt may pay a private sector firm to wholly or partially produce a public good
Private-sector contracters  
Private firms that are paid by the governemnt to provide public goods
Cons of state provision
Opportunity cost.
X-Inefficiency.
Misallocation
X-inefficiency  
Sate employees have limited incentive to minimise costs compared to private employees due top the lack of a profit motive
Effect of tax on negative externalities
Tax internalises negative externalities
How is tax meant to be set in order to reduce negative externalities
Equal to the external costs
Tradeable pollution permits 
Permits given out by the governemnt each year that define how much pollution a firm is allowed to produce
Tradeable pollution permits purpose
TPP incentivise firms to reduce pollution in the least costly way. Firms who find it costly, must buy pollution permits from firms who find it easier which increases their costs.