Market failures
Externalities, public goods and common resources, information asymmetries, market power: recognising each failure in a situation and choosing the instrument that corrects it.
- 26 cards
- 4 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
- Questions
- Sort and link
- Scenarios
A few cards from the deck
Externality: what is it?
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The effect of one agent's activity on others, suffered or enjoyed without payment and therefore ignored by the market price.
Negative (pollution), social cost exceeds private cost; positive (vaccination), social benefit exceeds private benefit. Either way the market produces the wrong quantity.
A good is a pure public good when it is:
- non-rival and non-excludable
- rival and non-excludable
- non-rival and excludable
- rival and excludable
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non-rival and non-excludable
Rival and non-excludable: common-pool resource. Non-rival and excludable: club good (a quiet toll motorway). Rival and excludable: private good (a sandwich).
A … appears when a single producer serves the whole market at a lower cost than several would, as with a water or rail network.
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A natural monopoly appears when a single producer serves the whole market at a lower cost than several would, as with a water or rail network.
The network's fixed costs are huge: duplicating pipes would be wasteful. The price is then regulated or the network is placed under public ownership.
Public good: what is it?
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A good that is non-rival (one person's use does not hinder others') and non-excludable (no one can be kept from benefiting).
Street lighting and national defence are examples: nobody has an incentive to pay voluntarily, hence funding through taxation.
On a used-car website, the good cars vanish and prices collapse. Which failure is at work?
- A negative externality
- Moral hazard
- Adverse selection
- A natural monopoly
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Adverse selection
The seller knows the car's condition, the buyer does not. Buyers pay an average price, good sellers withdraw: quality before the deal is hidden, hence adverse selection.