1.3 Market Failure Flashcards
What are negative externalities?
Costs suffered by third party as a result of an economic transaction
What is market failure?
When free market leads to misallocation of resources and government intervention is needed.
When market is not functioning optimally
What are positive Externalities
Benefits enjoyed by a third party as a result of an economic transaction
What are public goods?
Goods that are non-exclusive and non-rivalry
What are information gaps?
When there is a lack of information or asymmetric information in a market
What is abuse of monopoly power?
When one firm dominates the market in an industry (above 25%)
Define inequality
The difference in how assets/wealth/income are distributed among individuals and/or populations
What is marginal private benefit/cost?
Benefits/ costs experienced by consumers and producers in a transaction
What is marginal external benefit/costs?
Benefits/Costs experienced by a third party
What is marginal social benefit/costs?
Total benefit/costto society of the production/consumption of a good
What is difference between consumption externality and production externality?
A consumption externality causes the benefit/cost to a third party when a good is consumed
A production externality causes the benefit/cost to third party when a good/service is produced
What is a negative externality?
When a good causes external cost to third party from consumption or production (Overproduced)
What does the gap between the free market equilibrium and the socially optimal point represent on a negative production externality graph?
The overproduction of the good
What is a welfare loss (Negative Externalities)?
Output where costs to society are greater than benefits to society
What is a positive externality?
When consumption of a good/service creates spillover benefits enjoyed by a third party not involved in the market (MSB>MPB)
What is the marginal external benefit?
The benefit from consuming one more unit of a good/service that falls on a third party
What does the gap between the free market equilibrium and the socially optimal point represent on a positive production externality graph?
The Underproduction of a good
What is a welfare loss (Positive Externalities)?
The Marginal social benefit being drawn to the right of the marginal private benefit on the graph
Why are public goods underproduced?
They are unprofitable
What are gov policies for intervening in externalities?
Indirect taxes, Subsidies, regulation, Directly provide goods, Info provision, Property rights, carbon allowances
What are private goods?
Goods that are rivalrous and excludable
What does non rivalrous mean?
the benefit other people get from the good does not diminish if more people
consume the good.
What does non excludable mean?
by consuming the good, someone else is not prevented from consuming the good as well.
What is the free rider problem?
Due to non excludability, those who do not pay for the good can still benefit from it.
