Market Failure
- Created by: meganmirabelle
- Created on: 29-01-20 12:42
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- Market Failure
- Externalities
- External costs/benefits that occur during economic activity that impact the third party
- Only private costs and benefits are considered
- Types
- Positive consumption -benefit to the third party as a result of someone else consuming a good. They are under consumed
- Education, Healthcare,
- Can encourage consumption through subsidies, regulation and advertising - nudge policies
- Negative consumption cost to the third party as a result of someone else consuming a good. They are over consumed
- Smoking, Alcohol, Gambling
- Consumption can be discouraged through regulation, taxation, and nudge policies
- Positive Production - Benefit to the third party as a result of someone else producing a good, They are under produced
- Solar Panels
- Production can be encouraged through subsidies
- Negative Production - Cost to the third party as a result of someone else producing a good, They are over produced
- Pollution
- production can be discouraged through taxation and regulation
- Positive consumption -benefit to the third party as a result of someone else consuming a good. They are under consumed
- Merit/Demerit Goods
- Merit Goods
- Positive externalities are discharged when a merit good is consumed
- positive impact on the individual when consumed or produced
- They are under provided and under consumed
- Demerit Goods
- have a negative impact on the individual when consumed or produced
- They are over provided and over consumed
- Negative externalities are discharged when a demerit good is consumed
- Merit Goods
- Asymmetric Information
- Imbalance of knowledge between buyers and sellers
- could stem from false advertisement
- imbalance can be exploited leading to a misallocation of resources
- Governments can correct the imbalance through regulation, legislation and correct advertising
- Imbalance of knowledge between buyers and sellers
- Public Goods
- qualities of public goods
- Non-excludability: The benefits derived from pure public goods cannot be confined solely to those who have paid for it.
- Non-rival consumption: Consumption by one consumer does not restrict consumption by other consumers
- Non-rejectable: The collective supply of a public good for all means that it cannot be rejected by people, e.g. nuclear defence system or flood defence projects.
- The Free Rider Problem
- Because public goods are non-excludable it is difficult to charge people for benefiting form a good or service once it is provided
- Leads to under-provision of a good
- Quasi public good is close to a public good being semi non-rival and semi-non-excludable
- Nationalisation and state provision helps control public goods
- qualities of public goods
- Monopolies
- When there is a single dominant firm in the market
- They restrict supply then increase price
- Lack of quality and consumer choice
- Monopolies can be controlled through regulation, price capping breaking up the monopolies or nationalisation
- Inequality/ Inequity
- Differences in income and wealth
- Different standards of living
- Govt may uses progressive taxation, regulation and means tested benefits to correct market failure
- Immobility of Factors of Production
- Loss of productive potential
- Inefficient use of resources
- Geographical and occupational immobility
- Govt can correct misallocation by reforming the housing market and giving specific subsidies
- Environmental
- Examples are deforestation, over-fishing, pollution and illegal poaching
- Market failure can be corrected through taxation, pollution caps, permits, subsidies on renewable energy
- Degradation and depletion of resources
- Tragedy of the Commons
- Caused by lack of property rights meaning the govt cannot protect the resource
- Causes degradation and depletion of natural resources
- Over-fishing
- Market failure can be corrected through govt regulation and defined property rights
- Externalities
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