1.3. Market Failure Flashcards
Define “market failure”
When the free market leads to a misallocation of resources
Define “asymmetric information”
When the buyer or seller has more information than the other
The one with more information (often the seller) can exploit this information gap to their benefit
Define “symmetric information”
When both parties have the same amount of information
Define “positive externality”
When a good causes external benefits to a third party from consumption or production
Define “private benefit”
Benefit gained by the buyer
Define “external benefit”
Benefit gained by a third party
Define “social benefit”
The total benefit to society due to consumption or production
Define “negative externality”
When a good causes external cost to a third party from consumption or production
Define “private cost”
Cost incurred by the seller and buyer in the transaction
Define “external cost”
Costs incurred by a third party
Define “social cost”
The total cost to society due to consumption or production
Define “consumption externality”
When the external cost is created through usage or consumption
Define “production externality”
When the external cost is created through production
Define “non-rival”
When the consumption of a good or service by one person does not restrict consumption by other people
(an extra person watching fireworks)
Define “non-excludable”
When the benefits from a good or service cannot be confined solely to those that paid for it
(easy to watch fireworks outside of the event)
