Market Failure

Front 1

What is market failure a result of?

Back 1

Inefficient allocation of scarce resources.

Front 2

How does the inefficient allocation resources occur?

Back 2

The price mechanism (forces of demand and supply) fails to allocate resources efficiently.

Front 3

What are externalities?

Back 3

The effects of producing or consuming a good to an innocent third party not involved in the market transaction.

Front 4

What is private cost?

Back 4

The cost of doing something for consumer/firm.

Front 5

What are external costs? Give an example of an external cost?

Back 5

Costs caused by externalities. eg. consuming cigarettes could cause the cost of healthcare to rise because a third party suffers from the effects of passive smoking.

Front 6

What is social cost?

Back 6

The private and external costs added together which is the cost upon society.

Front 7

What is a private benefit?

Back 7

The benefit gained by consumers or firms.

Front 8

External benefits are caused by externalities. Give an example of an external benefit?

Back 8

Factory that invests in new equipment that is more energy efficient demands less energy, reducing impact on climate.

Front 9

Social benefit is the private and external benefit together. How does market failure occur?

Back 9

When only the private costs and benefits are taken into consideration and not the external costs or benefits.

Front 10

What are merit goods?

Back 10

Goods that have greater social benefits than private benefits.

Front 11

Give an example of merit goods?

Back 11

Health care and education.

Front 12

Why do merit goods tend to be underconsumed?

Back 12

• The positive externalitites they provide are ignored; production and consumption fall below optimal level.

• Imperfect information - consumers dont always realise full benefits merit goods provide.

Front 13

What are demerit goods?

Back 13

Goods that have greater social costs than private costs.

Front 14

Consumption of demerit goods is regarded as what?

Back 14

Harmful.

Front 15

Give an example of demerit goods?

Back 15

Cigarettes and Heroin.

Front 16

Give two reasons why demerit goods tend to be overconsumed?

Back 16

• In the free market negative externalities are ignored; production and consumption above socially optimal level.

• Due to imperfect information, consumers dont always realise harm that demerit goods cause.

Front 17

What can short term decision making affect?

Back 17

The consumption of goods.

Front 18

Why can short term decision making affect the consumption of goods?

Back 18

Individuals can fail to make provisions for future changes in circumstances.

Front 19

Give an example relating to short term decision making?

Back 19

An old age pension - the short term benefits of paying towards a pension (knowledge you are saving for old age) are less than the long term benefits of receiving pension.

Front 20

How can governments intervene in markets for merit and demerit goods?

Back 20

Governments can provide goods directly or make use of taxes and subsidies.

Front 21

What two characteristics do public goods have?

Back 21

• Non-excludable - people cannot be stopped from benefiting even if they have not been paid for - eg. armed services.

• Non-rivalry - one person benefiting from good doesn't stop others also benefiting - eg. flood defences.

Front 22

Private goods are excludable and exhibit rivalry. Give an example of this?

Back 22

University education - paying for a place in university takes a place and excludes anyone who can't afford it.

Front 23

What are public goods that exhibit characteristics of private goods called?

Back 23

Quasi (non pure) public goods.

Front 24

Give an example of quasi public goods?

Back 24

Roads - although free to use and one person using it doesn't prevent another adding a toll excludes people who don't pay and congestion will make a road exhibit rivalry as there's limited number who can benefit at any one time.

Front 25

New technology can cause what to occur?

Back 25

The changing of a public good to a private good.

Front 26

Give an example of new technology causing a change in good from public to private?

Back 26

• Analogue TV meant anyone who owns TV and aerial could receive broadcasts that were non-excludable and non-rivalrous.

• Invention of digital technology has meant channels can be encrypted to ensure people have to pay for it.

Front 27

Public goods are what, by the free market?

Back 27

Under provided.

Front 28

Outline the 'free rider problem'?

Back 28

It means once public good provided impossible to stop someone benefiting from it. eg. street cleaning services cannot stop free rider who refuses to pay benefiting from clean street.

Front 29

What cannot work if the free rider problem exists?

Back 29

The price mechanism - consumers wont choose to pay for public good they can get for free because other consumers have paid for it.

Front 30

If people wait and see who pays for public goods, what will happen?

Back 30

Public goods wont be provided.

Front 31

Why is it difficult to set a price for public goods?

Back 31

It is difficult to work out their value to customers; producers tend to overvalue benefits of public goods to try and raise price but consumers undervalue benefits to lower price.

Front 32

What does the problem with the value of these benefits mean for firms?

Back 32

Firms are reluctant to supply public goods leading to market failure.

Front 33

Positive externalities link to the free rider problem. Why?

Back 33

They are a form of public good and they're consumed by those who don't pay for them.

Front 34

What does symmetric information mean?

Back 34

Everyone has equal and perfect knowledge.

Front 35

What does symmetric information allow?

Back 35

Efficient allocation of resources as buyers and sellers are assumed to have full knowledge regarding price, costs, benefits and availability.

Front 36

What does asymmetric information involve?

Back 36

• Sellers have more information than buyers (eg. car salesmen has more knowledge on car history than buyer).

• Buyers have more information than sellers (eg. antiques collector has more information than seller).

Front 37

Provides of some services (eg. healthcare) have a lack of information as it is what?

Back 37

Unpredictable - healthcare providers don't know when someone is going to become ill.

Front 38

Moral hazard is a possible result as a result of asymmetric information. Explain concept of moral hazard?

Back 38

• When people take risks because they wont suffer consequences themselves - eg. home owner buys house insurance and behaves recklessly knowing they are covered.

• The insurance provider lacks information in regard to how consumer is behaving.

Front 39

What does asymmetric information mean for consumption of merit and demerit goods?

Back 39

• Merit goods are underconsumed and demerit goods are overconsumed; people lack info regarding full personal benefit of merit goods or they may not know the harmful effects of consuming demerit goods.

Front 40

Explain how information failure affects the provision of merit and demerit goods?

Back 40

Merit goods are underprovided and demerit goods are overprovided causing a misallocation of resources and market failure.

Front 41

Give an example of information failure in regard to merit/demerit goods?

Back 41

• Pension providers - greater knowledge of pension schemes available than clients; may sell more expensive schemes.

• Doctors have greater knowledge of medicine - may persuade clients to purchase more expensive care.

Front 42

Why might a consumer lack information as to what computer is best for their needs for example?

Back 42

May be too complex or confusing to understand technical differences.