When the market mechanism leads to a misallocation of resources the economy, either failing to provide the good/service or providing the wrong quantity.
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What are the types of Market Failures?
Externalities, The under-provision of public goods, Information gaps, monopolies and the Inequalities in distribution of income and wealth.
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What are externalities?
Is the cost or benefit of a public good a third party receives outside of the market
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What are negative externalities caused by?
The consumption of Demerit goods.
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What are positive externalities caused by?
The consumption of Merit goods.
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Public Goods
They are goods which are non-excludable and non-rival. They have a free- rider problem.
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Non- Excludable
By consuming the good, someone else is not prevented from consuming it.
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Free Rider problem
People who do not pay for a good still receive benefits from it.
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Who provides public goods and how?
The government has do provide public goods because consumers do not see a reason to pay for the good it they will receive the benefit without paying. It is funded using tax revenue.
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Private Goods
These are goods which are rival and excludable. E.G: Chocolate Bar.
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Quasi- public goods
A good which is not fully non-rival and where is it possible to exclude people. e.g: Roads.
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Consumption externality
An externality generated in the consuming of a good/ service.
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Externality
A benefit or cost dumped on third parties outside the market.
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Positive externality
Occurs when the consumption or production of a good causes a benefit to a third party, where social benefit is greater than private cost.
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Negative externality
Occurs when the consumption or production of a good causes a cost to a third party, where the social cost is greater than the private cost.
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Production externality
An externality generated in the production of a good or service.
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Social benefit
The total benefit of an activity, including the external benefits and well as the private benefit.
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Merit Good
A good for which the social benefits of consumption exceed the private benefits.
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What is the difference between a Merit good and a public good?
Public goods are no excludable and non rival which may cause a market to fail whereas a merit good are under provided leading to partial market failure.
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Two examples of Merit goods:
Healthcare and Education
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Subsidy
A payment made by government or other authorities, usually to producers, for each unit of subsidised good that they produce.
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Demerit Good
A good for which the social costs of consumption exceeds the private costs.
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Other cards in this set
Card 2
Front
What are the types of Market Failures?
Back
Externalities, The under-provision of public goods, Information gaps, monopolies and the Inequalities in distribution of income and wealth.
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