Theme 4 - Market failure across the economy

  • Created by: becky.65
  • Created on: 28-02-18 15:05
What do good working markets lead to?
Allocative efficiency; all inputs are used to generate the highest possible value and output corresponds to consumer preferences and their ability to pay for the goods they want
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When does market failure occur?
When the allocation of resources does not fit the pattern of consumer demand
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How can the market fail?
Businesses can use their market and monopoly power to alter the way market forces work, there may be under-production of a good that we need and there may be over-production of a good we don't need
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What are merit goods?
They can be provided by the private and public sector, but the free market provides a much lower level than what is optimum for society, so public sector action can fix this
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What are public goods?
One that the free market will not provide at all as there is no incentive for a producer to supply it, it is impossible to charge for it and make a profit and it's impossible to prevent any else from consuming it for free
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What are some examples of public goods?
National defence, street lighting, public parks
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How can public and merit goods cause market failure?
They might not be provided for at all because no one has an incentive to pay for it and it may not be available to all, thus there will be under-production
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How can demerit goods cause market failure?
There may be over-production that create high social costs
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How can negative externalities cause market failure?
They create spillover effects that are not reflected in the price of the product
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How can poor allocation of resources cause market failure?
It may leave people with a much lower standard of living due to income inequality from free functioning markets
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How can markets be corrected?
Government intervention
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What are the consequences of under-provision and under-consumption of merit goods?
If there was just private schools and hospitals, not everyone could afford to pay for the services so we'd have a less competent and healthy workforce, as well as a smaller workforce due to there being less jobs which will reduce economic growth
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In jargon terms, what are public goods said to be?
Non-rivalrous and non-excludable
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What does non-rivalrous mean?
When one person consumes a public good it does not affect or reduce the amount left for someone else to consume
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What does non-excludable mean?
It is impossible to prevent people who have not paid for a public good from consuming it
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Why are negative externalities a form of market failure?
The cost of negative externalities is not covered by the price of the product and third parties experience the external cost
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What are positive externalities?
They provide benefits to people who did not buy the product
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What are demerit goods?
They are overproduced in quantities that are above the optimal level for society as they have bad effects on society and produce expensive negative externalities
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What are some examples of demerit goods?
Smoking, alcohol, drugs, prostitution and gambling
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How can the overproduction of demerit goods be corrected?
The government can introduce tax, regulation, legislation or ban the good to reduce consumption levels
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How can labour markets fail?
When there is geographical or occupational immobility of labour due to being unable to meet the structural changes in society
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What is imperfect information?
It impairs the efficiency of markets because it leads to price distortions, making buyers pay more than they need to
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What is asymmetric information?
It occurs when either buyers or sellers do not have full information and the party with the full information exploits this
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How can imperfect or asymmetric information cause market failure?
People might make the wrong decision due to lack of information which means the market does not work properly as resources are not allocated as they should be
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How much of global GDP is environmental change costing?
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What are the negative externalities of of environmental change?
The effects of pollution and congestion, the way warmer temperatures will affect agricultural production and the destruction of sea-side cities
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How can the negative externalities of of environmental change be corrected?
Appropriate taxed on energy products
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However, how might negative externalities of of environmental change not ever be corrected?
Due to vested interests and profit maximisation that does not consider social costs
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Other cards in this set

Card 2


When does market failure occur?


When the allocation of resources does not fit the pattern of consumer demand

Card 3


How can the market fail?


Preview of the front of card 3

Card 4


What are merit goods?


Preview of the front of card 4

Card 5


What are public goods?


Preview of the front of card 5
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