What is market failure ?

Market failure is a situation where there is a misallocation of resources when markets are left to the price mechanism with no government intervention.

Define allocative efficiency .

Allocative efficiency is the optimal allocation of resources from society's point of view. Producers sell what consumers want.

True or false? Market failure always leads to over-provision of goods and services.

False. Market failure can lead to either over-provision or under-provision of goods and services.

What are the three main types of market failure ?

The three main sources of market failure are externalities , under-provision of public goods and information gaps.

How does the price mechanism work in a free market ?

The price mechanism in a free market determines the allocation of scarce resources through the interaction of demand and supply.

What are scarce resources ?

Scarce resources are the factors of production : land, labour, capital, and enterprise.

True or false? Free markets always work perfectly.

False . Free markets often work well but can sometimes lead to market failure .

What is a positive externality ?

A positive externality is an external benefit , which is a positive third party spill-over effect on individuals not involved in the economic transaction .

Define negative externality .

A negative externality is an external cost which is a negative third party spill-over effect on individuals not involved in the economic transaction.

What is a pure public good?

A pure public good is a good that is beneficial to society but would not be provided in a free market .

How do information gaps affect markets?

Information gaps distort market outcomes, resulting in market failure .

What is asymmetric information ?

Asymmetric information is when buyers and sellers have different levels of information about a good or service.

What is an externality ?

An externality is a third party spill-over effect on individuals not involved in the economic transaction .

What is a private cost ?

A private cost is what producers pay to produce a good or service and what consumers pay to purchase a good or service.

What is marginal private cost (MPC) ?

Marginal private cost is the cost of producing the next additional unit of a good or service.

How is marginal social benefit (MSB) related to marginal private benefit (MPB) ?

Marginal social benefit is assumed to be equal to marginal private benefit when focusing on the producer side of the market.

What does over-provision mean in terms of externalities ?

Over-provision means the free market produces more of a good or service than is socially optimal due to negative externalities .

True or false? Under-consumption always results from negative externalities .

False. Under-consumption results from positive externalities of consumption.

What is the welfare loss triangle ?

The welfare loss triangle represents the loss to society due to over-provision or under-provision of goods and services.

How can government intervention address externalities?

Government intervention can address externalities through measures such as taxes, subsidies, legislation and regulation.

What is a merit good ?

A merit good is a good that has positive externalities in consumption and is under-consumed in a free market.

What is a private good ?

A private good is a good that a firm produces to generate profits and consumers consume to gain utility, as it is excludable and rivalrous .

Define non-excludability .

Non-excludability is the inability to prevent non-paying consumers from accessing a good or service .

What does non-rivalry mean?

Non-rivalry means that one person's consumption of a good does not reduce its availability to others.

Why do private firms not provide public goods?

Private firms do not provide public goods because they cannot generate profits due to non-excludability and non-rivalry .

What is the free-rider problem ?

The free rider problem is a situation where people can benefit from a good or service without paying for it .

How does the free rider problem affect public goods ?

The free rider problem leads to under-provision or no provision of public goods in a free market.

True or false? Public goods are always provided by the government.

False. Public goods are often, but not always, provided by the government.

What is an example of a public good ?

Examples of public goods include street lighting flood defences public parks

How do public goods differ from merit goods ?

Public goods differ from merit goods in that private firms will not provide public goods at all , while some merit goods are provided by private firms, but underconsumed .

What are the main characteristics of public goods?

The main characteristic of public goods is that they are both non-excludable and non-rivalrous.

Why is national defence considered a public good?

National defence is considered a public good because it is non-excludable and non-rivalrous .

How does the government typically fund public goods ?

The government typically funds public goods through taxation .

What is an information gap ?

An information gap is a difference in the level of information available to buyers and sellers in a market.

Define symmetric information .

Symmetric information is when buyers and sellers have the same level of information about a good or service.

What is asymmetric information ?

Asymmetric information is when buyers and sellers have different levels of information about a good or service.

How do information gaps affect market outcomes?

Information gaps distort socially optimal prices and quantities in markets, resulting in over-provision or under-provision of goods and services.

True or false? Perfect information is a common feature of real-world markets.

False. Perfect information is an underlying assumption of free markets but rarely exists in reality.

What is an example of a market with asymmetric information ?

An example of a market with asymmetric information is the used car market , where sellers know more about the vehicle than buyers.

How can asymmetric information lead to market failure ?

Asymmetric information can lead to market failure by causing inefficient allocation of resources and sub-optimal market outcomes.

What is adverse selection?

Adverse selection is a market outcome where buyers or sellers use private information to their advantage, leading to inefficient outcomes.

Define moral hazard .

Moral hazard is a situation where one party takes more risks because another party bears the cost of those risks.

How can information gaps affect the quality of goods in a market?

Information gaps can lead to a decrease in the overall quality of goods in a market as sellers may have an incentive to offer lower quality products.

What role can a government play in addressing information gaps ?

A government can address information gaps by implementing regulations , requiring disclosures or providing information directly to consumers.

How might information gaps affect the pricing of goods?

Information gaps might lead to mispricing of goods, as buyers may not have accurate information about the true value or quality of a product.

A LevelEconomicsEdexcelEconomics AFlashcards1. Introduction to Markets & Market Failure1.3 Market Failure

1.3 Market Failure (Edexcel A Level Economics A)

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Cards in this collection (48)

What is market failure?
Market failure is a situation where there is a misallocation of resources when markets are left to the price mechanism with no government intervention.
Define allocative efficiency.
Allocative efficiency is the optimal allocation of resources from society's point of view. Producers sell what consumers want.
True or false?
Market failure always leads to over-provision of goods and services.
False.
Market failure can lead to either over-provision or under-provision of goods and services.
What are the three main types of market failure?
The three main sources of market failure are externalities, under-provision of public goods and information gaps.
How does the price mechanism work in a free market?
The price mechanism in a free market determines the allocation of scarce resources through the interaction of demand and supply.
What are scarce resources?
Scarce resources are the factors of production: land, labour, capital, and enterprise.
True or false?
Free markets always work perfectly.
False.
Free markets often work well but can sometimes lead to market failure.
What is a positive externality?
A positive externality is an external benefit, which is a positive third party spill-over effect on individuals not involved in the economic transaction.
Define negative externality.
A negative externality is an external cost which is a negative third party spill-over effect on individuals not involved in the economic transaction.
What is a pure public good?
A pure public good is a good that is beneficial to society but would not be provided in a free market.
How do information gaps affect markets?
Information gaps distort market outcomes, resulting in market failure.
What is asymmetric information?
Asymmetric information is when buyers and sellers have different levels of information about a good or service.
What is an externality?
An externality is a third party spill-over effect on individuals not involved in the economic transaction.
How are external costs calculated?
External costs are calculated using the formula
$Social costs - Private costs$
State the equation for social costs.
Social costs are calculated using the formula $Private costs + External costs$
What is a private cost?
A private cost is what producers pay to produce a good or service and what consumers pay to purchase a good or service.
Define social benefits.
Social benefits are
$Private benefits + External benefits$
What is marginal private cost (MPC)?
Marginal private cost is the cost of producing the next additional unit of a good or service.
How is marginal social benefit (MSB) related to marginal private benefit (MPB)?
Marginal social benefit is assumed to be equal to marginal private benefit when focusing on the producer side of the market.
What does over-provision mean in terms of externalities?
Over-provision means the free market produces more of a good or service than is socially optimal due to negative externalities.
True or false?
Under-consumption always results from negative externalities.
False.
Under-consumption results from positive externalities of consumption.
What is the welfare loss triangle?
The welfare loss triangle represents the loss to society due to over-provision or under-provision of goods and services.
How can government intervention address externalities?
Government intervention can address externalities through measures such as taxes, subsidies, legislation and regulation.
What is a merit good?
A merit good is a good that has positive externalities in consumption and is under-consumed in a free market.
What is a private good?
A private good is a good that a firm produces to generate profits and consumers consume to gain utility, as it is excludable and rivalrous.
Define non-excludability.
Non-excludability is the inability to prevent non-paying consumers from accessing a good or service.
What does non-rivalry mean?
Non-rivalry means that one person's consumption of a good does not reduce its availability to others.
Why do private firms not provide public goods?
Private firms do not provide public goods because they cannot generate profits due to non-excludability and non-rivalry.
What is the free-rider problem?
The free rider problem is a situation where people can benefit from a good or service without paying for it.
How does the free rider problem affect public goods?
The free rider problem leads to under-provision or no provision of public goods in a free market.
True or false?
Public goods are always provided by the government.
False.
Public goods are often, but not always, provided by the government.
What is an example of a public good?
Examples of public goods include
- street lighting
- flood defences
- public parks
How do public goods differ from merit goods?
Public goods differ from merit goods in that private firms will not provide public goods at all, while some merit goods are provided by private firms, but underconsumed.
What are the main characteristics of public goods?
The main characteristic of public goods is that they are both non-excludable and non-rivalrous.
Why is national defence considered a public good?
National defence is considered a public good because it is non-excludable and non-rivalrous.
How does the government typically fund public goods?
The government typically funds public goods through taxation.
What is an information gap?
An information gap is a difference in the level of information available to buyers and sellers in a market.
Define symmetric information.
Symmetric information is when buyers and sellers have the same level of information about a good or service.
What is asymmetric information?
Asymmetric information is when buyers and sellers have different levels of information about a good or service.
How do information gaps affect market outcomes?
Information gaps distort socially optimal prices and quantities in markets, resulting in over-provision or under-provision of goods and services.
True or false?
Perfect information is a common feature of real-world markets.
False.
Perfect information is an underlying assumption of free markets but rarely exists in reality.
What is an example of a market with asymmetric information?
An example of a market with asymmetric information is the used car market, where sellers know more about the vehicle than buyers.
How can asymmetric information lead to market failure?
Asymmetric information can lead to market failure by causing inefficient allocation of resources and sub-optimal market outcomes.
What is adverse selection?
Adverse selection is a market outcome where buyers or sellers use private information to their advantage, leading to inefficient outcomes.
Define moral hazard.
Moral hazard is a situation where one party takes more risks because another party bears the cost of those risks.
How can information gaps affect the quality of goods in a market?
Information gaps can lead to a decrease in the overall quality of goods in a market as sellers may have an incentive to offer lower quality products.
What role can a government play in addressing information gaps?
A government can address information gaps by implementing regulations, requiring disclosures or providing information directly to consumers.
How might information gaps affect the pricing of goods?
Information gaps might lead to mispricing of goods, as buyers may not have accurate information about the true value or quality of a product.