1.3.1 Glossary Market Failure Flashcards
Market failure
The failure of the market system (market forces) to allocate resources efficiently. Arises because the price mechanism has not taken into account all costs and benefits in production or consumption of a product or service.
Complete market failure
Occurs when the market doesn’t supply products at all so there is a missing market e.g. Public goods
Partial market failure
Occurs when a market functions/ exists but supplies either a wrong quantity or at the wrong price e.g. Doesn’t consider negative externalities from production or positive externalities from consumption.
Externalities
Costs and benefits to third parties who are not directly part of a transaction between producers and consumers (spill-over effect not taken into account by price mechanism).
Private costs
Costs faced by the producer or consumer directly involved in a transaction.
Negate externalities external costs)
Costs imposed on third parties as a result of a transaction they are not directly involved in. This means that output is too high but it is virtually impossible to quantity.
Social cost
Social cost = private cost + external costs
Marginal Social cost (MSC)
The addition to the cost of production by producing an extra unit of output.
MSC = MEC + MPC
Marginal Social benefit (MSB)
The addition to total benefits by consuming an extra unit of output.
MSB = MPB + MEB
Marginal private benefit
The benefit to the consumer of consuming an additional unit of output.
Marginal external benefit
The benefit to third parties from the consumption of an additional unit of output.
Marginal social benefit is greater than marginal private benefit
Positive consumption externalities
Positive externalities (external benefits)
When third parties benefit from the spill-over effects of production / consumption. This means that output is too low as consumers and producers don’t account for benefits to third parties.
Marginal private costs
The cost to the consumer / producer of consuming an additional unit of output.
Marginal external costs
The cost to third parties from the consumption / production ? of an additional unit of output.
