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Market failure and government failure
Description
economics (F581: Markets in action) Mind Map on Market failure and government failure, created by raid001 on 04/14/2013.
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economics
f581: markets in action
f581: markets in action
Mind Map by
raid001
, updated more than 1 year ago
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Created by
raid001
over 11 years ago
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Resource summary
Market failure and government failure
Market failure:where the free market mechanism fails to achieve economic efficiency.
MPC=costs incurred by the firms/individual carrying out the action
MSC=includes cost of 3rd party (external) affected as a result of production and private costs
Private costs=benefit received by firm/individual carring out the action (consum/prod)
Social costs=rewards/gains to society as a whole of a particular action (include external and private)
Negative externalities:social costs>private costs. imposed by a 3rd party over and above costs directly paid by those carrying out the activity
how lead to mf= firms take pvt costs into account and dont account for externalities(overproduction)
if the externalities had taken into consideration, supply would <shift (as less being produced). too many scarce resources being used=productive effic
Positive externalities:social benefits>private benefits
how lead to mf=(underproduced by firms). underprod of these goods that create +ve ext as the extreme benefits arent taken into consideration
due to this, demand is lower than it should be and too few scarce resources are being used
Merit/demerit/public goods
Merit goods=have more private benefits and greater postive effect than consumers know
Demerit goods=more harmful goods than consumers realise, and they generate negative externalities
Public goods=have non excludability and non rivalry
why lead to mf=consumed collectively so impossible to charge people for their use. unlikely that freemarket would provide these goods
so underprovided even though they are required by consumers
Quasi goods=have some of characteristics of public goods
Methods of intervention(to correct market failure)
State provision (govt provide it)
+ve would correct the underprovision (supply)
-ve opportunity cost;could be spent elsewhere, doesnt guarantee increased consumption
Indirect taxes
+ve discourage overprod of demerit goods, increase govt revenue
-ve no affect if youre addicted, decreases AD, demerit-inelastic so not affected
Subsides
+ undersupply of merit, incerased price level
-ve opportunity cost-money could be spend best elsewhere, depends on size/how its used, may also need a regulation in place
Regulations
+ve correct information failure, controls consumption of a particular good
-ve takes time, costly to regulate
Pollution permits
+ve reduces pollution, forces them to be more efficient
-ve costly, hard to regulate, get fined if go over (irreleveant/ineffective to MNCs
Provision of information
+ correct info/assymetric failure, learn about merit/demerit goods
-ve time, hard to understand fully
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