9708 · 3.1
Reasons for government intervention in markets flashcards
Revision flashcards for Cambridge 9708 Reasons for government intervention in markets (syllabus 3.1). Flip, recall, then mark a real past-paper question.
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What is market failure?
When free markets fail to allocate resources efficiently — output differs from the social optimum.
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Negative externality effect on output?
MSC > MPC → market overproduces — too much output compared to social optimum.
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Positive externality effect on output?
MSB > MPB → market underproduces — too little output compared to social optimum.
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Why are public goods not supplied by markets?
Non-excludability causes free-rider problem — no profit incentive for private firms.
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What is information failure?
Consumers or producers lack full information — e.g. asymmetric information in healthcare or insurance.
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Where is the social optimum on an externality diagram?
Where MSC = MSB (or MSB = MSC for negative production externality at Q where marginal social cost equals marginal social benefit).
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What is the 'free-rider problem'?
A market failure that occurs when individuals can consume a good or service without paying for it. This is common with non-excludable goods (public goods) and removes the profit incentive for private provision.
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Define a merit good.
A good that is considered socially desirable but is under-consumed by the free market. This is often due to information failure, where individuals do not fully appreciate the long-term private benefits.
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What is meant by 'internalising an externality'?
An economic policy that aims to make the producer or consumer pay for the external costs they generate. For a negative externality, this could be a tax that increases the private cost to the level of the social cost.
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What is asymmetric information?
A type of information failure where one party in an economic transaction has more or better information than the other party, leading to a potential misallocation of resources.
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What are the two key characteristics of a public good?
Non-rivalry (consumption by one person does not reduce availability for others) and non-excludability (it is not possible to prevent non-payers from consuming the good).
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What is a demerit good?
A good that is considered socially undesirable and is over-consumed by the free market, often due to information failure about its long-term harms (e.g., cigarettes, gambling).
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What is the difference between private cost and social cost?
Private cost (MPC) is the cost to the producer. Social cost (MSC) is the total cost to society, calculated as MSC = MPC + Marginal External Cost (MEC). Market failure occurs when MEC is not zero.