1.3 Flashcards
Define ‘market faliure’
When the market is not at optimum equilibrium either from too much or little consumption or allocation eg market allocation is off.
Why would negative externalities be considered a market failure
Goods that negatively effect a third party over allocated and consumed
Why would positive externalites be considered a market faliure
Goods that positively effects society under allocated and consumed
Why would public be considered a market faliure
Goods that arent in rivalry and are non-excudibility (very hard to stop someone using good without paying) causes market faliure as under provides as hard fot businesses to make profit
Why would infomation gaps be considered a market faliure
Consumers dont know enough about the product thus either more or less demand than there should be
Why would abuse of monopoly power be considered a market faliure
Firms set high prices and release little quantity than expected market equilibrium
Define marginal private cost MPC
Costs incurred by the seller and buyer in the transaction
Define Marginal external cost MEC
Costs incurred by the third party
Define marginal social cost MSC
The total cost to society of the consumptio and production of a good. Social cost = private cost + external cost.
Define ‘negative externality’
When a good causes external costs to a third party from consumption or production
Define welfare loss
Any product with negative externality+ costs outweigh the benefits
Define Marginal private benefit MPM
Benefits gained by consumers and producers in the transaction
Define marginal external external benefit MEB
Benefits gained by a third party (i.e not part of the transaction)
Define ‘marginal social benefit’ MSB
The total benefit to society of consumption/ production of a good
Social benefit = Private benefit + External benefit
Define the term positve externality
When a good causes external benefits to the third party not involved in the market transaction
