Econ - market failures

market failures

How can a market failure occur?

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

What are some types of market failures

• negative externalities

• positive externalities

• De-merit goods

• Merit-goods

• public good

• common access resources

• income inequality

• monopoly power

Negative externality in production

,and how can we draw this?

cost to 3rd parties of a result of actions of the producer

MSC>MPC

Negative externality in consumption

and how can we draw this?

cost to 3rd parties as a result of the actions of consumers

Positive externality in consumption ,and how can we draw it

benefits to 3rd parties as a result of the actions of consumers

MSB>MPB

Positive externality in production ,and how can we draw it

benefits to 3rd parties as a result of the actions of producers

MPC>MSC

What are Merit goods

Goods deemed more beneficial to consumers then they realise

MPB>PSB

why are merit goods under consumed?

Imperfect information

• info failure - when consumer or producers do not have enough information to make a rational decision

• Asymmetric info - one party knows more than the other

What are de-merit goods?

goods that are deemed more harmful to consumer than they realise

MSB<MPB

What is a public good?

a good that is non excludable and non-rival

• Non-excludable: No price can be charged for that good

• Non rivalry: If one person consumes if it doesnt effect another persons consumption

What is a quasi public good?

A good that has the some characteristics of a public good but not all of them

what is a monopoly?

is a market structure where one firm dominates the entire martket

what is monopoly power?

A firms ability to set prices above marginal cost due to a lack of competition

characteristics of a monopoly

• high barriers to entry

• can set any price

Advantages of monopolies

• can fund R AND D

• Stable employment

• economies of scale

disadvantages of monopolies

• higher prices and reduced output

• allocatively inefficient

• lack of competitive pressure

What are the different types of monopolies?

• Pure monopoly - 100% market share

• working monopoly - more than 25%

• Duopoly monopoly - 2 firms dominate the market

• oligopoly monopoly - a market dominated by a few firms