1.4 Market Failure Flashcards
Market Failure
is a failure of the market achieve allocative efficiency, resulting in the over or under allocation of resources
Externalities
Are spillover costs or benefits to a third party due to the consumption or production of a good or service.
MPB
The additional benefit gained by producing or consuming a product to the producer or consumer
MSB
The additional benefit gained by society by producing or consuming a product
MPC
The additional cost incurred by producing or consuming a product to the producer or consumer.
MSC
The additional costs incurred to society by producing or consuming a product.
Negative Externalities
Are the ‘bad’ effects that are suffered by the third party for which the the third party doesn’t get compensated, when a good or service is produced or consumed.
Positive Externalities
Are the beneficial effects that are enjoyed by a third party, but not paid for by the third party, when a good or service is produced or consumed.
Demerit goods
Are goods or services considered to be harmful to people who consume them and to society as a whole, that would be over-provided by the free market, and so over-consumed.
Merit goods
Are goods or services consided to be beneficial for people who use them and society as a whole, that would be under-provided by the free market, and so under-consumed.
Tradable permits
is a market-based solution to negative externalities of production. They are permits to pollute, issued by the government, which sets a maximum amount of pollution allowable. Firms may trade these permits for money.
Public goods
Are goods or services which would be under-provided or not provided at all by the free market. They are non-excludable and non-rivalrous, making it pointless for private individuals to provide the good themselves.
Common access resources
Are resources that are available to everyone.
example: Fishing pond
Asymmetric Information
Is when one party knows more than another in a transaction.
