market failure

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when does market failure occur
when the price mechanism (i.e. the forces of supply and demand) fails to allocate scarce resources efficiently and society suffers as a result(misallocation of resources).Market failure is a common problem and governments often intervene.
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what is a missing market
When there’s complete market failure, no market exists. National defence is an example of a missing market as there’s no market which allocates national defence. Therefore governments need to intervene and provide it
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what is partial market failure
When the market functions, but the price or quantity supplied of the good/service is wrong. If health care was left to market forces, then some people wouldn’t be able to afford the treatment they needed. governments might intervene, free healthcare
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what are externalities
the effects that producing or consuming a good/service has on people who aren’t involved in the making(third parties), buying/selling and consumption of the good/service.positive externalities have external benefits & negative ex. have external costs
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describe positive and negative externalities of production
A negative externality of producing steel could be pollution that harms the local environment.• A positive externality of producing military equipment could be an improvement in technology that benefits society.
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describe positive and negative externalities of consumption
negative externality consuming a chocolate bar is the litter that’s dropped on the street. A positive externalitity of someone training to become a doctor (remember — the training is being consumed) could be the benefit to society that this brings.
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what is a private cost
he cost of doing something to either a consumer or a firm. For example, the cost a firm pays to make a good is its private cost and the price a consumer pays to buy the good is their private cost.
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what is a private benefit
benefit gained by a consumer or a firm by doing something. For example, the private benefit a consumer might get from purchasing a skiing holiday is their enjoyment of the experience
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what is a social cost
Adding the private cost to the external cost gives the social cost. The social cost is the full cost borne by society of a good or service.
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what is a social benefit
Adding the private benefit to the external benefit gives the social benefit. The social benefit is the full benefit received by society from a good or service
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what are external costs
External costs are caused by externalities, e.g. if you dropped an empty crisp packet then that creates an external cost to the council who have to employ someone to sweep it up
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what are external benefits
caused by externalities, e.g. a factory that invests in new equipment may create the externalbenefit of needing less electricity, which reduces its impact on the climate.
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when does market failure occur
Market failure occurs because in a free market the price mechanism will only take into account the private costs and benefits, but not the external costs and benefits.
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Card 2

Front

what is a missing market

Back

When there’s complete market failure, no market exists. National defence is an example of a missing market as there’s no market which allocates national defence. Therefore governments need to intervene and provide it

Card 3

Front

what is partial market failure

Back

Preview of the front of card 3

Card 4

Front

what are externalities

Back

Preview of the front of card 4

Card 5

Front

describe positive and negative externalities of production

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