Understanding Market Failures: Imperfect Competition & Externalities
Market Failures
- Imperfect Competition
- Externalities: When production or consumption directly affects consumers or businesses not participating in the purchase or sale.
- Imperfect Information
- Negative Externalities: Markets produce a larger amount than socially desirable.
Internalize an Externality: Alter incentives for people to take into account the external effects of their actions.
Permits or Licenses: Allow targets of pollution with lower costs and direct controls.
- Positive Externalities: Markets produce a smaller amount than socially desirable. It is inefficient; the benefit to the parties is greater than the cost of parts.
- Public Goods: Goods that everyone can enjoy without being excluded, and the cost of consumption is zero. Benefit to the community but is not diminished when consumed.
- Consumer Parasitism: The person receiving the benefit of a good but not paying for it.
- Common Resources: Goods which are not excludable but are rivalrous, meaning they are not owned by anyone (e.g., fishing grounds).
- Imperfect Information: Prevents well-informed decisions.
- Asymmetric Information: When information about the quality and characteristics of goods and services, or actions of agents that influence them, is not distributed symmetrically between a consumer and producers.
- State Intervention: Improves economic efficiency, stabilizes the economy, favors economic growth, and aims to distribute income equally.
- Distributive Policy: Composed of government measures that aim to modify the distribution of income and make it more equal. Instruments: Taxes (obligatory contributions to the public sector), transfer payments (payments to public sector enterprises and citizens), direct intervention in market mechanisms.
- Poverty Rate: An indicator of income distribution, arises when individuals have insufficient income (related to age, race, family composition).
- Welfare State: The state changes the market forces to protect individuals and ensure a minimum standard of living.