52 terms

IB Economics Market Failure


Terms in this set (...)

The effects on third parties that arise from the production and consumption decisions of others. They are created when social costs and benefits differ from private cost and benefits.
Private cost
is the cost of an activity to an individual economic unit (E.x. a consumer or a firm) Ex. worker wages, raw materials
Social Cost
the total cost to society of the production or consumption of a product including private cost and negative externalities.
Negative Externality
Occurs when social cost is greater than private cost. They are harmful effects on third parties for which they are not compensated (E.x. Air pollution, water pollution)
Negative Externalities of production
Negative Externalities of consumption
Private Benefit
Benefits received by those who produce or consume a product. (E.x. Utility(consumers) Revenue (producers)
Social Benefit
is the total benefit to society from producing or consuming a good / service.
It includes all the private benefits plus any external benefits of production / consumption.
If a good has significant external benefits, then the social benefit will be greater than the private benefit.
Positive Externality
is created if social benefit is greater than private benefit. They are beneficial effects on third parties for which they do not pay (E.x. vaccinations)
Positive Externality of Production
Positive Externality of Consumption
Market based policies
these measure are aimed at altering demand and supply in order to bring about an efficient allocation of resources. (E.x. indirect taxes, subsidies, provision of information and the provision of property rights)
Non-market based policies
involve more direct intervention in Markets. (E.x. state provision, government- set regulations and standards, competition policy and price controls)
indirect taxes
taxes on goods and services; expenditure tax ex. sales tax (On demerit goods)
Direct tax
taxes on income, profit and wealth (On demerit goods)
grants paid by the government to producers to lower cost of production (Normally on Merit Goods)
Merit Good
are goods and services which are deemed to be good for individuals and society as a whole but would be under consumed if left to the market
Demerit Good
are goods and services which are deemed to be bad for the individual and society as a whole but would be over consumed if left to the free market
Public Goods
is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others the government has to provide these goods and finance them through taxation.
Non-Rivalry Public goods
This means that when a good is consumed, it doesn't reduce the amount available for others.
- E.g. benefiting from a street light doesn't reduce light for others, but eating an apple would.
Non-Excludable Public goods
This occurs when it is not possible to provide a good without it being possible for others to enjoy. E.g erecting a dam to stop flooding, or providing law and order.
Private Goods
Goods which are rival and excludable
Quasi Public Goods
some goods meet some of the criteria for a public good but not all of them , they are mixed goods
This exists when there is only one supplier in a market. however, monopoly power exists where firms have a dominant position in a market
Barriers to entry
factors which make it difficult for firms to enter and industry and compare with existing producers
Allocative efficiency
where the appropriate quantity of resources is devoted to producing products, achieved when firms produce where MC=P This occurs when there is an optimal distribution of goods and services, taking into account consumer's preferences.
Productive Efficiency
occurs when firms produce at the lowest point on their lowest average cost curve
a market structure dominated by a few large firms and in which there are high barriers to entry and exit
Remedies For Market Failure
taxes/subsidies; state provision; legislation; trade-able permits; extending property rights; provision of information; price controls; competition policy
Market power
the ability to influence others
Marginal Cost
the charge in total cost when output is changed by one unit.
Welfare loss
A loss experienced by consumers when output occurs at a point where MSC is not equal to MSB
Market Failure
the failure of market forces to achieve an efficient allocation of resources.
Distribution of Income and Wealth
Governments use progressive tax to redistribute income from rich to poor
Progressive taxes
take a higher portion of rich people's income than poor people. Ex. income tax
Factor Mobility
can be encouraged by taxing resources in declining uses and areas and subsidising them in expanding uses and areas.
Provisions of Information
Aims to correct market failure arising from inadequate or inaccurate information either by the government providing the information or by forcing the suppliers or consumers to provide full information.
The pursuit of self interest
by politicians and civil servants, rather than operating on behalf of citizens, leads to misallocation of resources.
Electoral pressure
leading to inappropriate government spending and tax decisions
time lags
it takes time to recognize that a market failure is occurring to draw up an appropriate policy and implement it.
Abuse of power
politicians and civil servants may abuse their power to purse their own financial and career interests rather than seeking to increase the public good.
A tendency to look for short term solutions
to economic problems rather than making considered analysis of long term considerations. x
Lack of Information
Not given enough information bout suppliers or products
inaccurate information
Suppliers may provide inaccurate information to their rivals. E.g. if asked how much they pay they may say pay is lower than it really is.

Consumers may not give accurate information to suppliers
Asymmetric Information
Where information is unlikely to be shared equally between 2 parties
Geographical immobility
there is difficulty in moving resources from one area to another. there will be a shortage or resources in some areas and a surplus in others
occupational immobility
Arise when it is difficult to move resources from one use to another. E.X land is relatively occupational mobile
State provisions
governments provide goods and services when they think that markets will fail to produce them or fail to produce them in sufficient times
Nationalised industries
Protecting consumers from higher prices where monopolies exist. Ensuring that social costs and benefits are taken into account when production decisions are made.
Legislation and Regulations
Governments- set standards and regulations, enforced by law to seek to correct market failure
Some Barriers to entry are
Legal barriers, Brand names, licenses, High sunk costs
Trade-able permits
designed to reduce pollution and combine government control use of the market