2.4 market failure Flashcards
market failure
The failure of the free market to achieve allocative efficiency, where too much or too little of a good or service is consumed and produced relative to the socially optimal level where social surplus is maximized
allocative inefficiency
The failure to allocate resources into the production of goods and services that maximizes social surplus, such that MB is NOT MC
externalities
The failure to take into account the positive/negative impact on third parties during consumption and production, resulting in over/under allocation of resources
public goods
The failure of the free market to provide essential goods that are non-rival and non-excludable
marginal private benefit (MPB)
Extra benefit to consumers from the consumption of one more unit of good/service
marginal private cost (MPC)
Extra cost to producers from the production of one more unit of good/service
marginal social benefit (MSB)
Extra benefit to society from the consumption of one more unit of good/service
marginal social cost (MSC)
Extra cost to society from the production of one more unit of good/service
deadweight loss
Welfare loss to society as measured by the loss of producer and consumer surplus
merit goods
Deemed to be good by the government but under consumed by consumers
demerit goods
Deemed to be bad by the government but over consumed by consumers
non-rivalrous
Consumption by one person does not reduce the consumption by another
non-excludable
Impossible to exclude non-payers from enjoying the good or service
common access resources
Are rivalrous but non-excludable; owned by no one but free for all to use
sustainability
Normally refers to environmental sustainability, where the consumption of resources today does not threaten the ability to produce goods and services in the future
