1.3 Market Failure - Basic concepts and definitions Flashcards
Market failure
Where free market outcomes lead to major problems for society, usually inefficiency
Public good
A good with non-excludability and non-rivalry (which is therefore almost impossible for private firms to sell profitably)
Private good
A good which can be consumed by the buyer exclusively and whose benefits can therefore be denied to others (excludable and rival).
Property right
A legal entitlement (which can be bought or sold) to the exclusive use of a resource.
Free rider problem
When those who benefit from resources, goods or services don’t pay for them, which results in either an under-provision of those goods/services or an overuse or degradation of a common property resource.
Negative externality
A side effect of a market activity which harms third parties without compensation,
Positive externality
A side effect of a market activity which benefits third parties without them having to pay.
Marginal Private Cost (MPC)
The addition to total cost to the firm from an extra unit of production.
Normally MPC = supply curve
Marginal External Cost (MEC)
The additional (external) cost suffered by the third party from an extra unit of production.
Marginal Social Cost (MSC)
The additional cost to society (ie firm and third party) from an extra unit of production.
MSC = MPC + MEC
Marginal Private Benefit (MPB)
The additional benefit to the consumer from an extra unit of production.
MPB = demand curve
Marginal External Benefit (MEB)
The additional (external) benefit to third parties from an extra unit of production.
Marginal Social Benefit (MSB)
The additional benefit to society (ie consumers and third parties) from an extra unit of production.
Socially optimal production
Output where allocative efficiency is maximised (ie MSB = MSC). Maximum welfare to society is generated here
Deadweight loss
Net welfare lost from not producing at the socially optimal production.
