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ECONOMICS THEME 1 - TOPIC 1.3 - MARKET FAILURE - Coggle Diagram
ECONOMICS THEME 1 - TOPIC 1.3 - MARKET FAILURE
types of market failure
market failure occurs when the market fails to allocate scarce resources efficiently, causing a loss in social welfare loss
3 main types...
externalities
the cost or benefit a third party receives from an economic transaction outside of the market mechanism
in simpler terms its the spill over effect of the production or consumption of a good
e.g cars and cigarettes are negative whilst education and healthcare are positive
under-provision of public goods
are non rivalry and non-excludable and are under-provided in the private sector
the market is unable to provide enough of these e.g street lights
information gaps
e.g consumers don't know the quality of second hand products
this is asymmetric information
one party is in possession of more information than the other
externalities
social costs/benefits
are the costs or benefits of the activity to society as a whole
external costs/benefits
are the costs or benefit to a third party not involved. They are the difference between private and social costs/benefits
private costs/benefits
are the costs or benefits to the individual participating in the economic activity
a
merit good
is a good with external benefits where the benefit to society is greater than to the individual
under-provided in free market
a
demerit good
is like a merit good but just as a cost instead of a benefit
over-provided in free market
negative production diagram^
positive consumption diagram^
government intervention methods...
provision of the good e.g NHS
provision of information e.g cancer warnings on cigarettes
trade-able pollution permits
regulation e.g banning advertising on smoking
indirect taxes + subsidies
public goods
they're
non-rivalry
(which means one persons use doesn't stop anothers)
also
non-excludable
(which means you can't stop someone accessing the good)
e.g street lights
free-rider problem
says that you cannot charge an individual a price for the provision of a non-excludable good
a free rider is someone who benefits without paying for it
private sector will not provide public goods as there is no guarantee of profit
therefore its provided by the state and financed through taxation
information gaps
symmetric information
occurs when buyers and sellers have potential access to the same information (this is the perfect information)
asymmetric information
is when one party has superior knowledge compared to another and takes advantage of the other party
advertising leads to information gap as it tries to persuade consumers. However, due to technology, information gaps are on the decline as more people can access the information
information gaps lead to market failure as there is a misallocation of resources because people do not buy thing that maximise their welfare
one example is drugs