micro market failure

market failure

when the free market fails to allocate scarce resources at the socially optimum level of output

negative externalities

costs on third parties as a result of the actions of a separate agent

positive externalities

benefits to third parties as a result of the actions of a separate agent

information failure

a lack of information resulting in consumers and producers making irrational decisions that do not maximise welfare

asymmetric information

the information of a good is not shared equally between two parties

de-merit goods

goods that are deemed more harmful to consumers than they realise e.g. cigarettes, alcohol

will generate negative externalities in consumption

merit goods

goods that are deemed to be more beneficial to consumers than they realise e.g. exercise, education

will generate positive externalities in consumption

public goods

goods that are non-excludable or non-rival in consumption e.g. street lights, road signs

free rider problem & missing market

when consumers do not contribute to the production of public goods, so firms do not have the incentive to supply these goods and therefore there is a missing market

quasi goods

a good that can be excludable but is rivalrous, or something that can be rivalrous but not excludable.

common access resources

natural resources over which no private ownership has been established e.g. forests, seas, air

tragedy of the commons

a situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

income inequality

the unequal distribution of income

monopoly power

the ability of a monopoly to dictate what takes place in a given market.

factor immobility

a market failure in which factors of production are immobile and cannot be increased

government failure

when the costs of an intervention outweigh the benefits, worsening of the allocation of scarce resources harming social welfare

sources of government failure

1. information failure (the right policy is required)

2. admin and enforcement costs very high (regulation, subsidies, state provision, price controls)

3. unintended consequences (black markets, impact on the poor, impact on firms, employment)

4. regulatory capture (when gov regulate monopoly power)