Market failure and government failure

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economics (F581: Markets in action) Mind Map on Market failure and government failure, created by raid001 on 14/04/2013.
raid001
Mind Map by raid001, updated more than 1 year ago
raid001
Created by raid001 over 11 years ago
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Resource summary

Market failure and government failure
  1. Market failure:where the free market mechanism fails to achieve economic efficiency.
    1. MPC=costs incurred by the firms/individual carrying out the action
      1. MSC=includes cost of 3rd party (external) affected as a result of production and private costs
        1. Private costs=benefit received by firm/individual carring out the action (consum/prod)
          1. Social costs=rewards/gains to society as a whole of a particular action (include external and private)
            1. Negative externalities:social costs>private costs. imposed by a 3rd party over and above costs directly paid by those carrying out the activity
              1. how lead to mf= firms take pvt costs into account and dont account for externalities(overproduction)
                1. if the externalities had taken into consideration, supply would <shift (as less being produced). too many scarce resources being used=productive effic
            2. Positive externalities:social benefits>private benefits
              1. how lead to mf=(underproduced by firms). underprod of these goods that create +ve ext as the extreme benefits arent taken into consideration
                1. due to this, demand is lower than it should be and too few scarce resources are being used
              2. Merit/demerit/public goods
                1. Merit goods=have more private benefits and greater postive effect than consumers know
                  1. Demerit goods=more harmful goods than consumers realise, and they generate negative externalities
                    1. Public goods=have non excludability and non rivalry
                      1. why lead to mf=consumed collectively so impossible to charge people for their use. unlikely that freemarket would provide these goods
                        1. so underprovided even though they are required by consumers
                      2. Quasi goods=have some of characteristics of public goods
                      3. Methods of intervention(to correct market failure)
                        1. State provision (govt provide it)
                          1. +ve would correct the underprovision (supply)
                            1. -ve opportunity cost;could be spent elsewhere, doesnt guarantee increased consumption
                            2. Indirect taxes
                              1. +ve discourage overprod of demerit goods, increase govt revenue
                                1. -ve no affect if youre addicted, decreases AD, demerit-inelastic so not affected
                                2. Subsides
                                  1. + undersupply of merit, incerased price level
                                    1. -ve opportunity cost-money could be spend best elsewhere, depends on size/how its used, may also need a regulation in place
                                    2. Regulations
                                      1. +ve correct information failure, controls consumption of a particular good
                                        1. -ve takes time, costly to regulate
                                        2. Pollution permits
                                          1. +ve reduces pollution, forces them to be more efficient
                                            1. -ve costly, hard to regulate, get fined if go over (irreleveant/ineffective to MNCs
                                            2. Provision of information
                                              1. + correct info/assymetric failure, learn about merit/demerit goods
                                                1. -ve time, hard to understand fully
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