IB Economics, Market failure – Flashcards
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when a market (using P mechanism) doesn't allocate resources efficiently --> creating shortage or surplus
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Market failure
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costs or benefits related to a good or service that FALLS ON OTHERS besides buyers and sellers of that particular good or service
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externalities
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some form of social (rather than private) ownership
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Public
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the use of something by 1 person prevents the use of it by others (i.e. pen)
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rivalrous
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the use of something by 1 person doesn't prevent the use of it by others (i.e. online, tv)
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non-rivalrous
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you can't use it unless you pay for it (i.e. your education)
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excludable
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people can't be kept from using it even if they don't pay (i.e. a country's defense)
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non-excludability
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rivalrous and exclusive
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private good
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have positive externalities, non rivalrous and non-exclusive (i.e. defense, police, navigation systems, flood control, broadcasting, pavements, street lighting)
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public good
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Gs provides public goods b/c private sector won't -"free rider" problem (people enjoy the benefits of the good without paying a share of its cost)
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Provision of public goods
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A cost to society NOT paid by the consumer or producer - they pay the private, but not external or "social" costs b/c these are ignored in the market - i.e. air pollution, traffic, global warming -non-rivalrous & non-excludable
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negative externality
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Incurred by the individual producer, so the S and the MPC curves are the same
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private costs
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Ignored in the market, but they exist - "MSC"
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social costs
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"Tickets to pollute" - solution to the negative externalities, if you don't have the ticket, you can't pollute (=> countries forcing their producers to pollute less) - ALSO if you don't use all of your tickets, you can sell them
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Negative externalities production - tradable permits
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Rivalrous and exclusive (i.e. alcohol, drugs, guns) - G can decrease consumption by making laws prohibiting, advertise against (decrease D) or place taxes (decrease S)
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Negative externalities consumption- demerit goods
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Shifts D/MPB, decrease
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Negative advertising demerit goods
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Shifts S, decrease
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Taxing demerit goods
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A benefit to society NOT paid by the consumer or producer - get it w/o paying for it - i.e. pretty gardens, people who take public transport, a health or educated population - non-rivalrous and non-excludable
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Positive externality
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incurred by the individual consumer
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private benefits
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ignored by market, graphed as MSB
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social benefits
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Rivalrous and exclusive (i.e. education, medical care, bus transport, immunizations, contraception) - mkt shortage - G can take any action to increase consumption, i.e. direct provision (increase Q), advertising (increase D), and subsidizing (increases S)
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Positive externalities on consumption
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Increases Q - instead of a higher P, G provide it a P of 0 or ration it at a price ceiling
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Direct provision of merit goods
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shifts D out, increase
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Advertising merit goods
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increases S
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Subsidizing merit goods
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Production makes society better off - i.e. training staff, private gardens - Gs can subsidize or direct provision it
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Positive externalities on production
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Exists when consumption today (current generation) does not prevent consumption later (future generations)
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Sustainability
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Resources difficult to exclude people from using (typically natural resources) - i.e. FOSSIL FUELS, oceans, clean air, rain forests, fishing areas, water
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Common access
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"Free rider" problem, goods have no P -> overuse/deplation/degradation, LACK OF SUSTAINABILITY
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Common access problem
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1)free market - individual choice 2)green-no growth 3)social efficiency- tax/subsidize, extend property rights, law to restrict or prohibit
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Common access problem-approach
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Consumers and/or producers aren't informed i.e. hire incompetent lawyer, buy beauty cream but no results, due to technology Sers have cut costs but not passed that onto consumers
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Assymetrical info
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quality is clear prior to purchase so consumer can concentrate on product selection and P, i.e. clothing, pen
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Search goods
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have characteristics that consumers learn after the purchase i.e. restaurant meal
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Experience goods
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Goods/services that their quality becomes apparent after the purchase, i.e. annual car services, a lawyer might lose in spite of effort
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Credence goods
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1)warranties 2)ligitation-threat of action by the courts for bad quality 3)demanding costumers 4)reputation
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Market based solutions for assymetrical info
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1)Legislation, consumer protection laws, i.e. children's toys, flammability, food safety 2)Regulation, laws that producers must meet, i.e. quality standards and licenses (doctors, teachers, lawyers etc) 3)Provision of information, G advertising, i.e. cigarettes, drunk driving
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Gov. based solutions for assymetrical info
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When 1 firm takes control of the market- they can LIMIT S in order to control Ps --> inefficiency
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Monopoly power
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1)Laws, "anti trust laws", G has authority to force you to sell off parts 2) Regulation, G watchdogs oversee operations & can control P 3)Nationalization, G takes over your company
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Gov. responses to monopoly power
