Market failure and government failure

Mind Map by , created over 6 years ago

economics (F581: Markets in action) Mind Map on Market failure and government failure, created by raid001 on 04/14/2013.

Created by raid001 over 6 years ago
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Market failure and government failure
1 Market failure:where the free market mechanism fails to achieve economic efficiency.
1.1 MPC=costs incurred by the firms/individual carrying out the action
1.2 MSC=includes cost of 3rd party (external) affected as a result of production and private costs
1.3 Private costs=benefit received by firm/individual carring out the action (consum/prod)
1.4 Social costs=rewards/gains to society as a whole of a particular action (include external and private)
1.5 Negative externalities:social costs>private costs. imposed by a 3rd party over and above costs directly paid by those carrying out the activity
1.5.1 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
2 Positive externalities:social benefits>private benefits
2.1 how lead to mf=(underproduced by firms). underprod of these goods that create +ve ext as the extreme benefits arent taken into consideration
2.1.1 due to this, demand is lower than it should be and too few scarce resources are being used
3 Merit/demerit/public goods
3.1 Merit goods=have more private benefits and greater postive effect than consumers know
3.2 Demerit goods=more harmful goods than consumers realise, and they generate negative externalities
3.3 Public goods=have non excludability and non rivalry
3.3.1 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
3.4 Quasi goods=have some of characteristics of public goods
4 Methods of intervention(to correct market failure)
4.1 State provision (govt provide it)
4.1.1 +ve would correct the underprovision (supply)
4.1.2 -ve opportunity cost;could be spent elsewhere, doesnt guarantee increased consumption
4.2 Indirect taxes
4.2.1 +ve discourage overprod of demerit goods, increase govt revenue
4.2.2 -ve no affect if youre addicted, decreases AD, demerit-inelastic so not affected
4.3 Subsides
4.3.1 + undersupply of merit, incerased price level
4.3.2 -ve opportunity cost-money could be spend best elsewhere, depends on size/how its used, may also need a regulation in place
4.4 Regulations
4.4.1 +ve correct information failure, controls consumption of a particular good
4.4.2 -ve takes time, costly to regulate
4.5 Pollution permits
4.5.1 +ve reduces pollution, forces them to be more efficient
4.5.2 -ve costly, hard to regulate, get fined if go over (irreleveant/ineffective to MNCs
4.6 Provision of information
4.6.1 + correct info/assymetric failure, learn about merit/demerit goods
4.6.2 -ve time, hard to understand fully

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