Lecture 3- Market failure (1)

One benefit about equilibrium when market is working is [blank_start]resources[blank_end] are allocated in most [blank_start]efficient[blank_end] way- both [blank_start]productively efficient[blank_end] (P=MC) & [blank_start]allocatively efficient[blank_end] (P>MC) in long run

Another benefit about equilibrium when market is working is there is no requirement for [blank_start]government intervention[blank_end] which reduces [blank_start]costs[blank_end] & [blank_start]resource waste[blank_end]

Third benefit about equilibrium when market is working is [blank_start]normal profits[blank_end] are made. This benefits [blank_start]consumers[blank_end] but ensure [blank_start]factors of production[blank_end] are rewarded

Fourth benefit about equilibrium when market is working is maximum [blank_start]consumer surplus[blank_end] & [blank_start]economic welfare[blank_end]

Assumptions made relating to market is working include [blank_start]perfect information[blank_end], no [blank_start]firm[blank_end] or [blank_start]customer[blank_end] dominates market, all [blank_start]costs[blank_end] & [blank_start]benefits[blank_end] relate to buyer & seller, rapid or instant [blank_start]switching[blank_end] for both buyer & seller, no [blank_start]money[blank_end] illusion & ignore [blank_start]equity[blank_end] concerns

Market failure- When [blank_start]free market[blank_end] leads to [blank_start]misallocation[blank_end] of [blank_start]resources[blank_end] in an economy

One type of market failure is [blank_start]imperfect information[blank_end]. This is when [blank_start]buyers[blank_end] &/[blank_start]sellers[blank_end] do not have [blank_start]full knowledge[blank_end] about [blank_start]price[blank_end], [blank_start]costs[blank_end] & [blank_start]benefits[blank_end] about good or service & are therefore unable to make [blank_start]fully informed[blank_end] decisions

Two types of imperfect information are [blank_start]asymmetry information[blank_end] & [blank_start]moral hazard[blank_end]. [blank_start]Asymmetry information[blank_end] is when there is [blank_start]difference[blank_end] in [blank_start]information[blank_end] available to each of two parties involved in [blank_start]transaction[blank_end]. [blank_start]Moral hazard[blank_end] is when one party lacks [blank_start]information[blank_end] about [blank_start]performance[blank_end] of other party involved in [blank_start]transaction[blank_end]

Another type of market failure is [blank_start]missing market[blank_end]. This is when [blank_start]free market[blank_end] fails to create [blank_start]market[blank_end] for good or service

[blank_start]Tragedy of commons[blank_end] can be related to missing market. It refers to people acting in their [blank_start]own best interests[blank_end] who overuse [blank_start]common resource[blank_end] without considering this will lead to [blank_start]degradation[blank_end] of that [blank_start]resource[blank_end]

Third type of market failure is [blank_start]externalities[blank_end]. This refers to [blank_start]external costs[blank_end] or [blank_start]benefits[blank_end] to [blank_start]third party[blank_end] that is not involved in [blank_start]making[blank_end], [blank_start]buying/selling[blank_end] & [blank_start]consumption[blank_end] of good/service. There is difference between [blank_start]private[blank_end] & [blank_start]social[blank_end] costs & benefits

Merit goods- Goods that have [blank_start]benefits[blank_end] to [blank_start]society[blank_end] or [blank_start]economy[blank_end] as whole, as result of people [blank_start]producing[blank_end] or [blank_start]consuming[blank_end] that good. Examples include [blank_start]healthcare[blank_end] & [blank_start]education[blank_end]. For these goods, [blank_start]marginal social benefit[blank_end] is greater than [blank_start]marginal private benefit[blank_end] & therefore there is an [blank_start]underconsumption[blank_end] of merit goods

Demerit goods- Goods that have [blank_start]costs[blank_end] to [blank_start]society[blank_end] or [blank_start]economy[blank_end] as whole, as result of people [blank_start]producing[blank_end] or [blank_start]consuming[blank_end] that good. Examples include [blank_start]alcohol[blank_end] & [blank_start]tobacco[blank_end]. For these goods, [blank_start]marginal private benefit[blank_end] is greater than [blank_start]marginal social benefit[blank_end] & therefore there is an [blank_start]overconsumption[blank_end] of demerit goods

Fourth type of market failure is [blank_start]public goods[blank_end]. These are [blank_start]goods[blank_end] that are [blank_start]non-excludable[blank_end], [blank_start]non-rival[blank_end] & [blank_start]non-diminishable[blank_end]. Marginal cost for [blank_start]public goods[blank_end] are equal to [blank_start]zero[blank_end]. This leads to [blank_start]free rider problem[blank_end] which is when person [blank_start]benefits[blank_end] from good or service without [blank_start]paying[blank_end] for it