Market Failure IB Economics

market failure

a situation in which a market left on its own fails to allocate resources efficiently

Common access goods

include the environmental natural resources such as air, minerals, oil, forests that we all depend on. They are typically non-excludable but yet are rivalrous.

public goods

Goods that are neither excludable nor rival in consumption

Merit goods

Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for underprovision: Good may have positive externalities, or consumer ignorance about the benefits of the good.

Demerit goods

goods or services considered to be harmful to people that would be over-provided by the market and so over-consumed.

externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

positive externality of consumption

When there is a spillover benefit of consuming a good or service onto a third party.

positive externality of production

when the production of a good or service creates a benefit to third parties.

negative externality of consumption

The external costs to a third party that occur when a product is consumed.

negative externality of production

when the production of a good or service adversely affects third parties

asymmetric information

a situation in which one party to an economic transaction has less information than the other party

social benefits

private benefits + external benefits

marginal social cost

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

marginal social benefit

The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

Welfare loss

Refers to a loss of a portion of social surplus that arises when MSB doesn't equal MSC.

Solutions to Negative Production Externalities

Indirect Taxation, Assigning and enforcing property rights over assets, Tradable pollution permits (cap and trade schemes), Advertising, Persuasion, Education

Solutions to Negative Consumption Externality

legislation

taxation

regulation

advertising

Non-rivalrous

A characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else; it is one of the two characteristics of public goods.

Non-excludable

A characteristics of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price. It is one of the characteristics of public goods.

Tragedy of the Commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

monopoly power

the ability of a firm to make it impossible for rival firms to compete with it, either through advertising or in some other way