19- Market Failure- Externalities Flashcards
Causes of market failure?
- Information gaps (merit goods)
- Positive externalities
- Labour immobility
- Public goods
- Natural Monopoly
What is market failure?
When the free market fails to allocate scarce resources at the socially optimum level of output.
What is the (marginal) private cost?
The cost to those who are directly in the market.
What is the (marginal) external cost?
The cost to the 3rd parties as a result of the markets existence.
What is the (marginal) social cost?
The sum of private costs and external costs
What is a consumption externality?
When the social costs of consumption are different to the private cost of consumption. If social benefit exceeds private benefit it is a positive externality and if private benefit is greater than social benefit it is a negative externality.
What is the social cost of benefit?
The cost/benefit to society as a whole.
What is the private cost or benefit?
The cost or benefit of an activity to an individual economic unit such as a consumer or firm.
Externality or spill over effect definition?
The difference between social costs and benefits and private costs and benefits. If net social cost (social cost - social benefit) is greater than the net private cost). Then a negative externality/ external cost exists. If net social benefit is greater than private net cost there is a positive externality.
Why will government want to intervene when there is marker failure?
To improve social welfare
