Market failure

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  • Created by: emsvelho
  • Created on: 28-05-17 13:07
What is symmetric information?
When consumers and producers both have the same amount of knowledge about a product
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Why is symmetric information rare?
No time to research everything about the product
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What is asymmetric information?
When consumers and producers don't have the same amount of knowledge about a product
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Why does asymmetric info cause market failure?
There is underconsumption of merit goods, and overproduction of demerit goods
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Why does underconsumption of merit goods occur?
Info failure, asymmetric info and only private benefits are considered
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Explain the concept of 'lemons'?
Low price = poor quality, high price = good quality. However, consumers are uncertain so they assume the worst, making these products 'lemons' causing a fall in sales and therefore market failure due to underconsumption
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Why are moral hazards present in insurance companies?
Consumers are more likely to take risks as they know they are covered which leads to asymmetric info as the insurance providers (producers) do not know how the consumers are acting
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What are solutions to information failure?
Provide info via ads, for example, subsidise merit goods and state provision and regulation
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What are public goods?
Goods that are provided by the government as firms have no incentive to produce them and are consumed collectively
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What does 'non-rival' mean?
The consumption by one person doesn't stop others from consuming it
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What does 'non-excludable' mean?
Once provided, people cannot be stopped from consuming the good
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What are quasi-public goods?
Public goods with features of private goods
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What is an example of a quasi-public good?
Roads: tolls can make it excludable and congestion can make it rivalrous
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What are 'free riders' and how does it affect the price mechanism?
The price mechanism cannot work as once provided, everyone can benefit from it so no one is willing to pay for it
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Why is it difficult to set a price on public goods?
Producers tend to over value to make more profit, consumers tend to undervalue to pay less
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What is a negative externality?
A disadvantage to the third party who is not involved in the initial transaction. This is not taken into account by the price mechanism
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What happens to negative externalities in a free market?
In a free market, only private costs are considered so output is Pm=Qm. Price falls and there is overproduction so MSC>MSB for each unit sold leading to a welfare loss (area between MSC and MSB)
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Evaluate negative externalities?
Neg ext can be outweighed by pos ext, magnitude depends on extent to which the government intervenes and difficult to attach monetary value to them as difficult to measure
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What are 'positive externalities'?
An advantage to the third party who is not involved in the initial transaction. This is not taken into account by the price mechanism
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What happens to positive externalities in a free market?
Only private benefits are considered in a free market so output Pm=Qm causes a fall in price due to underconsumption so MSB>MSC for each unit of good consumed. The welfare gain the the area between MSB & MSC
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Other cards in this set

Card 2

Front

Why is symmetric information rare?

Back

No time to research everything about the product

Card 3

Front

What is asymmetric information?

Back

Preview of the front of card 3

Card 4

Front

Why does asymmetric info cause market failure?

Back

Preview of the front of card 4

Card 5

Front

Why does underconsumption of merit goods occur?

Back

Preview of the front of card 5
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