1.3- Market failure

what is the free rider problem?

When consumers have the incentive to avoid paying as they will rely on others to pay for them but still use the good/ service

What is market failure?

When the price mechanism fails to allocate resources efficiently

what are public goods?

Non rivalrous + non excludable

define non rivalrous

consumption of the good by one person does not reduce the amount available to be consumed by others

what is asymmetric information?

when one party has more information than the other, leading to imperfect decisions + market failure

define equilibrium

the point where quantity demanded equals quantity supplied, meaning there is no tendency for price to change

types of market failure

• externalities

• under-provision of public goods

• information gaps

what is imperfect information?

lacking crucial information to make a rational decision

What is symmetric information?

when buyers and sellers have the same amount of information

Karl Max

argued for more government intervention

define an externality

a cost or benefit arising from production or consumption that affects a 3rd party not involved by market transaction

when labelling externalities diagram, what axis?

costs/benefits

quantity

What is rational behaviour?

when consumers act to maximise utility + firms act to maximise profit on full information

What is irrational behaviour?

when consumers don’t maximise utility due to emotions or cognitive limitations

ADV and DIS of division of labpour

ADV- higher productivity - more skilled workers

DIS - worker boredom- monotony of work, low motivation- possible understaffed

- overdependence of workers- of one stops, whole process might fail