1.3 Market failure Flashcards
define market failure
a situation that arises when the free market equilibrium does not lead to the socially optimum allocation of resources , such as too little or too much of a good is consumed or produced
define an externality?
a cost or benefit that is external to a market transaction and thus not reflected in market prices, which may affect third parties not involved in the transaction
define an external cost?
costs to a third party not involved within the economic transaction
define a private cost?
costs to the individual involved within an economic transaction
define a private benefit?
benefits to the individual involved within an economic transaction
define an external benefit?
benfits to a third party not involved within an economic transaction
what is the social benefit?
external benefit + private benefit
what is social cost?
external cost+ private cost
what is marginal social cost?
the added cost to society from consuming an extra unit of a good
what is marginal social benefit?
the added benefit to society from consuming an extra unit of a good
what is a negative production externality?
they occur when the social costs are greater than the private costs
when left to a free market where will a firm operate on externalities diagram
MPC = MPB
what point is best for society?
MSC=MSB
what is the supply curve on a externality diagram ?
MPC`
what is the demand curve on an externality diagram?
MPB
what are examples of a negative production externality?
toxic fumes, industrial waste and noise pollution from airplanes
why are the lines MSC and MPC diverging?
this is because at small quantity the external cost is not much for example one person driving a car, but as quantity rises the external costs do aswell, lot more pollution when lots drive
define a merit good?
a good with external benefit so social benefit is greater than private benefit (usually underprovided by the free market
what are examples of merit goods?
education, health programs, public libraries
what is a demerit good?
a good with an external cost so social cost is greater than then private costs (usually overprovided by the free market)
what is the issue of measuring the size of
externalities?
a lot of the external costs and benefits are normative statements as they are based on value judgements, some people may see Christmas lights as a benefit however some may find them tacky so negative
why is it hard for governments to tackle externalities that are international such as global warming?
actions in one country may have an affect on another country so the only solution is to have an international agreement between countrys to reduce the externality.
what was the Kyoto protocol?
it was a summit in 1997 where most developed countries in the world agreed to reduce emissions by 6% by 2010 however, USA (the largest emitter of CO2 at the time) did not join due to economic reasons
what is the effect of global warming on world inequality?
the largest polluters are the transport and industry from developed countries which causes sea level to rise which affects the developing countries especially flat land such as
