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Market Faillure - Coggle Diagram
Market Faillure
Externalities
Externalities are spill-over effects from production and consumption. They lie outside the initial transaction in the third parties and they create market failure due to a welfare loss or gain.
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Welfare loss: The cost paid by the third party for the production of a good. Reduces with less production and a higher price. Partial market failure.
Welfare gain: The missing gain that the third party could have with more consumption and a higher price. Partial market failure.
Public and Private goods
Private goods
Excludable, rivalled and rejectable
Public goods
Non-excludable, non-rivalled and non-rejectable
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Free rider problem: Once a public good is provided people do not have to pay to receive the benefit. This results in people who do not pay for the good.
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Information Failure - market failure because the marginal private benefit is lower than it should be with a lack of information. If there was enough information, there would be higher demand.
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symmetrical information
Markets work best with symmetrical information. This means that the consumer and the producer both know everything there is to know and they know the same amount.
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Types of market failure
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Market failure is quite common because information gaps between consumers and producers happen often.