1.3 Market Failure Flashcards
if there’s is no externality…
private cost = social cost
private benefit = social benefit
define a negative externality
occurs when there is a negative effect on a third party for which no compensation is paid
formula of social cost
private cost + external cost
formula of external cost
social cost - private cost
define production externality
the negative effect in the the third party which is caused by production of the good
in an externality graph what does the y-axis change to
costs and benefits
in a externality graph what does the supply curve change to
marginal cost
in a externality graph what does the demand curve change to
marginal benefit
in a negative externality graph what does the marginal cost curve split into
marginal social cost
marginal private cost
out of MSC and MPC which curve is first on a graph
MSC
what is point a on this graph
free-market equilibrium - where the market would work at without government intervention
what is point c on this graph
social equilibrium
social cost = social benefits + no externality
(allocative efficiency)
what is the private cost on this graph
OQ1aP1p
what is the external cost
P1pabP1s
what is a positive externality
occurs when there is a positive effect on a third party for which no compensation is paid
formula of social benefit
private benefit + external benefit
formula of external benefit
social benefit - private benefit
define consumption externality
the positive effect on the third party is caused by the consumption of the good
what is abc in this graph
welfare gain
what is Q1 to Q2 on this graph
under consumption
what does MB split up into on a positive externality graph
marginal private benefit
marginal social benefit
on a positive externality graph out of MPB and MSB which curve comes first
MPB
what is point a on this graph
private equilibrium/ free-market equilibrium - where the market will operate at without government intervention
what is point c on this graph
social equilibrium (allocative efficient point)
define public good
- non-rival: the quantity of good doesn’t diminish upon consumption
- non-excludable: no price can be charged for the good
- non-efficient pricing
- benefits of consumption cannot be confined to the individual
define private good
- rivalry: the quantity of the good diminishes upon consumption
- excludable: possible to prevent others from consuming the good
define quazi public good
some attributes of a public good but not all
what is the free-rider problem
occurs when people who benefit from a good use it and avoid paying for it by waiting for others to pay for it first
how do public goods lead to market failure
- free rider problem
- no profit = no incentive for free market so good is underprovided
define de-merit good
brings about negative externalities, not good for society
example of public good
national defense
