12 - Markets, efficiency and public policy

Question 1

Market failure

Answer 1

When markets allocate resources in a Pareto-inefficient way

Question 2

External effect (externality)

Answer 2

A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract (outside).

Question 3

Marginal social cost (MSC)

Answer 3

The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good’s production. MSC is the sum of the marginal private cost and the marginal external cost.

Question 4

Pigouvian tax (or subsidy)

Answer 4

Tax levied on activities that generate negative external effects so as to correct an inefficient market outcome, to encourage economic activity that has positive effects (or govt subsidy)

Question 5

Coasean bargaining

Answer 5

The idea that private bargaining might be preferable to dealing with external effects by governmental intervention.

Question 6

Asymmetric information

Answer 6

Information that is relevant to the parties in an economic interaction, but is known by some but not by others.

Question 7

Moral hazard

Answer 7

Any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affect party does not have adequate info on the action.

Question 8

Adverse selection

Answer 8

The problem faced by parties to an exchange in which the terms offered by one party will cause exchange partners to drop out. e.g. if the price of insurance is too high, the only people who will seek to purchase it are those who know they are ill (but the insurer doesn’t)

Question 9

Public good

Answer 9

A good for which use by one person does not reduce its availability to others.

Question 10

Repugnant markets

Answer 10

Area considered by society to be outside the range of market transactions and that bringing this area into a market could be immoral, eg. paid surrogacy vs adoptive ‘selling’.

Question 11

Merit good

Answer 11

Goods and services that should be available to everyone, regardless of their ability to pay