1.3 (market failure) Flashcards
define market failure
when the price mechanism leads to a misallocation of resources.
what are the 4 types of market failure?
- Negative externalities
- Positive externalities
- Public goods
- Information gaps
define negative externality
costs which affect third parties outside the price mechanism
define negative consumption externalities
costs that affect third parties (outside the price mechanism) , as a result of the consumption of a good.
define negative production externalities
cost which affects third parties, as a result of the production of a good.
what is the formula for social cost?
social cost= private costs+ external costs
what is the formula for social benefit?
social benefit= external benefits+ private benefits
define private cost
A cost to a producer or consumer inside the price mechanism.
define Socially efficient equilibrium
Where MSC = MSB and society’s welfare is maximised.
define minimum price
The lowest price a good can be legally sold for.
. the price above the equilibrium
define a non-excludable good
cant exclude others from consuming your good
.public goods are non-excludable, however private goods are excludable
define public goods
goods that are non-excludable in consumption and non-rival in production
what is the free rider problem?
.consumers wont demand
.producers wont supply.
what does the free rider problem lead to?
an inefficient allocation of resources.
define information gap
when consumers or producers lack the information needed to make an informed decision.
what are the two types of information gaps?
- incomplete information
- asymmetric information
define incomplete information
Incomplete information is when someone doesn’t have full information about the benefits or costs of their decisions.
