Market failure

What are private goods?

What are examples?

Private goods are excludable (consumption can be prevented) and rival (consumption be one person reduces the quantity available to others).

E.g a chocolate bar or teddys.

What are public goods?

What are examples?

Public gods are non-excludable (once a good is provided, consumption of the good by any person cannot be stopped) and non-rival (consumption by one person doesn’t prevent others from consuming the good).

E.g street lighting, lighthouses, national nuclear defence, police, roads

What are quasi-public goods?

What are examples?

Goods which are not fully rival and/ or can be excludable- it is possible. to exclude people from consuming the product. (non-pure public goods).

E.g street lighting, roads, television

What’s the free rider problem and how is it resolved?

Free riders are people who consume/ benefit from a good but do not pay for them (due to it being non-excludable). Due to this, people will gradually stop paying for these goods due to this being deemed as unfair, this results in the goods being unprofitable and so there is no incentive to provide the good, the market disappears.

This is overcome with government intervention, tax (payment) towards the good becomes mandatory.

What is market failure?

Market failure occurs when the market mechanism leads to a misallocation of recourses in the economy, either completely failing to provide a good or service or providing the wrong quantity.

What is complete market failure?

Complete market failure is when a market fails to function at all and a ‘missing market’ results.

What is partial market failure?

Partial market failure is when a market does function but it delivers the ‘wrong’ quantity of a good or service, which results in recourse misallocation.

What’s a missing market?

Missing market is a situation in which there’s is no market because the functions of the prices have broken down.

What are externalities?

Costs arising from production or benefits arising from consumption that affect third parties and are not reflected in the price and output level determined by the market. They are due to a divergence between private and social costs and benefits.

What are positive externalities?

Positive externalities are positive costs and benefits arising from the production or consumption of a good or service that are incurred/ experienced by a third party.

What are negative externalities?

Negative externalities are negative cost and benefits incurred/experienced by third parties (MSC>MPC or MSB>MPB)

What’s the free rider problem?

Free-riders benefits from a good without paying due to the good being non-excludable. Too many free riders (not enough customers) results in a missing market as there is no incentive to supply the good.

What are production externalities? What are examples of positive and negative production externalities? How are these displayed?

An externality generated in the course of providing a good or service. Examples: negative production externality- the pollution that a power station emits. Positive production externality- the warm water (good for fish) that a power station emits