1.3.1 Market Failure and Externalities Flashcards
define market failure
when the market forces of supply and demand do not result in an efficient allocation of resources.
why does market failure arise
because the price mechanism does not take into account all the costs and/or benefits in the production and consumption of the product
define externalities
costs or benefits that are not directly part of a transaction between producers and consumers
why are externalities a form of market failure
market forces will not result in an efficient allocation of resources. since some of the effects will be felt by third parties, they may not be aligned with the best interests of society
define a negative externality
harmful effect of an economic activity on third parties aka external cost
define a positive externality
beneficial effect of an economic activity on third parties, aka external benefit
where can externalities occur
- production stage of an economic activity
- consumption stage of an economic activity
what are the three types of cost
- private cost
- external cost
- social cost
define private costs
costs to the individual participating in the economic activity
give examples of producer’s private costs
raw materials, energy costs
what are consumer’s private costs
usually the price paid for the good
what represents private costs
the supply curve
what are external costs
costs to the third party - negative spillover effects from the production or consumption which the market fails to take into account
give an example of an external cost of production
depleting a natural resource
what are social costs
costs to society as a whole
