1.3 Market Failure

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1.3.1 What is the definition of market failure?
When a free market, left to its own devices and free from any government intervention, fails to make the best use of its scarce resources. This can lead to welfare losses.
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1.3.1 What types of market failures are there?
Negative externalities in production. Positive externalities in consumption. Demerit goods. Merit goods. Under-provision of public goods.
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1.3.1 What is complete market failure?
When the free market fails to make a market for a good or service (missing market).
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1.3.1 What is partial market failure?
When a market for a good or service exists but that good or service is consumed in quantities that do not maximise societies welfare.
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1.3.1 What is a merit good?
A good that consumers don't understand the true benefit of so is under-consumed.
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1.3.1 What is a demerit good?
A good that consumers don't understand the true harm of so is over-consumed.
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1.3.2 What is an externality?
An effect on a third party due to an economic transaction.
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1.3.2 What is Marginal Social Cost?
Marginal Private Cost (cost to consumer) + External Cost (cost to third parties)
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1.3.2 What is Marginal Social Benefit?
Marginal Private Benefit (benefit to consumer) + External Benefit (benefit to third party)
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1.3.2 When is social welfare maximised?
MSB = MSC
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1.3.3 What is a public good?
A good that is non-excludable. Non-rivalrous. Non-rejectable. Non-diminishing.
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1.3.3 What is a private good?
A good that is excludable. Rejectable. Rivalrous. Diminishable.
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1.3.3 What is the free rider problem?
This says that you cannot charge an individual a price for the provision of a non-excludable good because someone else will gain the benefit from it without paying anything. A free rider is someone who receives the benefits without paying for it.
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1.3.4 What is information failure?
A source of market failure where market participants do not have enough information to be able to make an effective judgement about the correct level of consumption or production of a good.
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1.3.4 What is asymmetric information?
When one economic agent knows more than another giving them more power in a market transaction.
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Card 2

Front

1.3.1 What types of market failures are there?

Back

Negative externalities in production. Positive externalities in consumption. Demerit goods. Merit goods. Under-provision of public goods.

Card 3

Front

1.3.1 What is complete market failure?

Back

Preview of the front of card 3

Card 4

Front

1.3.1 What is partial market failure?

Back

Preview of the front of card 4

Card 5

Front

1.3.1 What is a merit good?

Back

Preview of the front of card 5
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