market failure
- Created by: Sophie.ellenx
- Created on: 07-04-21 15:30
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- Market Failure
- market failure ocurd when a market fails to allocate scare resources efficiently, causing a loss in social welfare
- externalities - the cost of benefit a third party receives from an economic transition outside of the market mechanism
- a merit good is benefit to society is greater than than to the individual, tend to be underfunded by the free market
- external costs/benefits- third party not involved in economic activity - difference between private and social
- private costs/ benefits - individual participating in econimic activity
- negative production externality - occur when social costs are greater than private costs
- positive consumption externalities- social benefits are greater than social costs, welfare los of shaded area
- information gaps
- symemetric info occurs when buyers and sellers have access to same info (perfect info)
- many decisions are based on imperfect info so economic agents cant make informed decisins - suffer from info gap
- asymmetric info - when 1 party has superior knowledge compared to another - seller can take advantahe of other partys lack of knowledge, by charging a higher price
- advertising leads to info gaps as its designed to chnage attitudes, technology reduces info gaps as people can get more info
- lead to market failure as there is a misallocation of resources as people dont buy things that maximise their welfare - price and quanity arent as soial optium position and economic agents cant make rational decisions
- examples - drugs, pensions, financial services
- prinicapal agent problem - tthe goals of the principle ( person who gains/loses are different from the agents ( those making decisions on behalf of the principle
- symemetric info occurs when buyers and sellers have access to same info (perfect info)
- externalities - the cost of benefit a third party receives from an economic transition outside of the market mechanism
- a merit good is benefit to society is greater than than to the individual, tend to be underfunded by the free market
- external costs/benefits- third party not involved in economic activity - difference between private and social
- private costs/ benefits - individual participating in econimic activity
- negative production externality - occur when social costs are greater than private costs
- positive consumption externalities- social benefits are greater than social costs, welfare los of shaded area
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