MARKET FAILURE: the economic situation in which the allocation of resources is not efficient, leading to a net loss of economic value
EXTERNALITY: the consequence or benefit that affects a third party who did not choose to incur that cost or benefit In the presence of externalities, the market outcome is not at the socially optimal level. In other words, there are spillover costs or benefits that affect a third party who did not choose to incur the cost or benefit. Externalities relate to market failure because price equilibrium cannot reflect the true costs or benefits to society as a whole when externalities are present. Examples of positive externalities:
Examples of negative externalities:
With regard to COVID-19:
Rivalrous Goods: when a good is rival in consumption, in other words consumption by one consumer reduces the ability of another consumer to consume
Non-Rivalrous Goods: when goods are not rival in consumption, in other words consumption by one consumer does not reduce the ability of another consumer to consume
Excludable Goods: goods that can be prevented from allowing everyone to use it
Non-Excludable Goods: goods that cannot be prevented from allowing everyone access. In other words, non-paying customers cannot be prevented from using the good
Private Goods: goods that yield private benefits and are excludable and rival in consumption.
Public Goods: goods that are non-excludable and non-rival. Individuals cannot be effectively excluded from using them, and use by one individual does not reduce the good’s availability to others. Public goods are related to market failure because some individuals can decide not to pay but use the good anyway. These people are known as free riders.
Free-Rider: a person who benefits from something without expending effort or paying for it Common Goods: any good that is rivalrous yet non-excludable. Market failure in terms of common goods would be considered the Tragedy of the Commons
Tragedy of the Commons: an economic problem in which every individual has an incentive to consume a resource at the expense of every other individual with no way to exclude anyone from consuming. It results in over consumption, under investment, and ultimately depletion of the resource. Club Goods: excludable but non-rivalrous goods, at least until reaching a point where congestion occurs. These goods would not cause market failure because there cannot be overuse due to the excludability and non-rivalry.
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