Concept
Market failures occur when the allocation of goods and services by a free market is not efficient, leading to a net social welfare loss. These failures often justify government intervention to correct inefficiencies and improve overall economic outcomes.
Relevant Degrees
Concept
Public goods are non-excludable and non-rivalrous resources, meaning they can be consumed by anyone without reducing their availability to others. This characteristic often leads to market failures, as private markets struggle to provide these goods efficiently without government intervention.
Concept
Externalities are costs or benefits incurred by a third party as a result of an economic transaction, which are not reflected in the transaction's price. They can lead to market failures if not properly addressed, as the true social cost or benefit is not accounted for in the decision-making process.
Concept
Monopoly power refers to the ability of a single firm to control a market, setting prices and output levels without competition constraints. This power can lead to reduced consumer choice, higher prices, and inefficiencies in the market, prompting regulatory scrutiny and intervention to protect consumer welfare and ensure fair competition.
Concept
Information asymmetry occurs when one party in a transaction has more or better information than the other, leading to an imbalance of power and potentially suboptimal decision-making. This phenomenon is prevalent in various markets and can result in market failures, adverse selection, and moral hazard.
Concept
The 'Tragedy of the Commons' is a situation in which individuals, acting in their own self-interest, deplete shared resources, leading to long-term collective detriment. This concept highlights the tension between individual benefits and collective sustainability, emphasizing the need for cooperative management of common resources.
Concept
Market power refers to the ability of a firm or group of firms to influence or control the price and output of a product or service in the market, often leading to reduced competition. It allows firms to maintain higher prices and margins than would be possible in a perfectly competitive market, potentially leading to inefficiencies and consumer harm.
Concept
Incomplete markets refer to financial markets where not all possible risks can be insured against or hedged, leading to situations where certain risks remain unmanageable. This limitation affects the allocation of resources and can lead to inefficiencies in the economy, as some desirable trades or investments cannot occur due to the absence of necessary financial instruments.
Concept
Transaction costs refer to the expenses incurred during the process of buying or selling goods and services, beyond the price of the goods themselves. These costs can include search and information costs, bargaining and decision costs, and policing and enforcement costs, all of which can impact the efficiency of markets and economic exchanges.
Concept
Moral hazard occurs when an individual or organization is more likely to take risks because they do not bear the full consequences of those risks, often due to some form of insurance or guarantee. This situation can lead to suboptimal decision-making and increased likelihood of negative outcomes, as the party insulated from risk may act less cautiously than they otherwise would.
Concept
Adverse selection occurs when there is asymmetric information between buyers and sellers, leading to high-risk individuals being more likely to purchase insurance or participate in a market. This can result in market inefficiencies and potential failure, as insurers may raise premiums to cover the higher risk, driving away lower-risk individuals.
Concept
Poverty traps are self-reinforcing mechanisms that cause poverty to persist, making it difficult for individuals or communities to escape without external intervention. They often result from a combination of economic, social, and institutional factors that limit access to resources and opportunities needed for upward mobility.
Concept
Institutional economics examines how institutions—the rules and norms governing economic activity—shape economic behavior and outcomes. It emphasizes the role of historical and cultural contexts in the development of economic systems, challenging the notion that markets operate independently of social and political influences.
Concept
New Institutional Economics (NIE) expands traditional economic analysis by incorporating the role of institutions and transaction costs in shaping economic performance. It emphasizes the importance of legal, political, and social frameworks in influencing economic behavior and outcomes, challenging the notion of perfectly efficient markets.
Concept
Real-world economic issues encompass the practical challenges and problems that economies face, influencing policy-making, business strategies, and individual financial decisions. These issues are often complex, requiring a multidisciplinary approach to understand and address the underlying causes and effects.
Concept
The principles of economics serve as the foundational framework for understanding how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their needs and wants. These principles help in analyzing the mechanisms of production, distribution, and consumption of goods and services in a world of limited resources.
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