Unit 2.10 Market Failure

demerit goods

• a lack of information about how harmful these products are for the consumer leads them to be overconsumed

• a high level of regulation ensures these products are underconsumed

• a strong marketing strategy makes these products more appealing to consumers

• a government subsidy encourages responsible consumption of these products

non-excludability

• consumers who have not paid for a good (or service) cannot be excluded from benefiting from the consumption of that good or service

• only consumers who have paid for a good (or service) can benefit from its consumption

• consumers must pay to access a good (or service) and cannot share it with others

• consumers can be excluded from benefiting from a good (or service) if they have not paid for it

merit goods

• a lack of information about how beneficial these products are for the consumer leads them to be underconsumed

• a high price makes these products less accessible to consumers

• a surplus of information leads to overconsumption of these products

• a government subsidy increases the availability of these products

Price fixing

• When two or more firms agree to sell a product at the same price

• When companies compete to lower prices

• A strategy to increase product quality

• When firms agree to limit production

Private benefits

• the benefits to an individual or business when they produce or consume a good or service

• the costs incurred by society when a good or service is produced

• the benefits that accrue to the government from taxation

• the negative impacts on the environment from production activities

factor immobility

• the difficulties in transferring factors of production so that they may be used by an alternative industry

• the ease of moving resources between different industries

• the ability to quickly adapt to changes in market demand

• the process of reallocating resources without any cost

private goods (private service)

• goods that is possible to exclude individuals from consuming if they have not paid; and there is rivalry in the consumption of the goods

• goods that are available for free to everyone regardless of payment

• goods that can be consumed by multiple individuals simultaneously without exclusion

• goods that are provided by the government to ensure equal access for all

social costs

• the private costs plus the external costs of producing a good or service

• the total revenue generated from selling a good or service

• the costs incurred by consumers when purchasing a product

• the expenses related to marketing and advertising a product

spillover effects

• effects on a third party

• benefits to the primary party

• negative impacts on the environment

• increased costs for consumers

public goods (public service)

• goods that consumers cannot be excluded from enjoying even if they have not paid; everyone can equally enjoy consuming the good

• goods that are only available to those who pay for them

• goods that are provided by private companies for profit

• goods that can be consumed by one person without reducing availability to others