2.8 Market Failure Flashcards
Market failure
Failure of the market to allocate resources efficiently
Socially optimal allocation
marginal social benefit=marginal social cost
Marginal social benefit
Additional benefit society gains for consuming an additional unit of a good.
Marginal social cost
the additional cost to society of producing an extra unit of a good.
MSC
Marginal private cost+ marginal external cost
MSB
Marginal private benefit+ Marginal external benefit
External benefit
The benefit to third parties outside the market transation between consumer and producer
External cost
Cost to third part outside the market transaction between consumer and producer
Externalities
Spillover effects on third parties
Welfare loss
the social loss incurred when the market diverges from the social optimum (MSB=MSC).
Deadweight welfare loss
The loss to society of an externality not taken into account in the private transation between consumer and producer.
Negative consumption externality
When the optimal quantity consumed by society is less than the amount exchanged in the private market.
Positive consumption externality
When the optimal quantity consumed by society is more than the quantity consumed in the private market.
Negative production externality
When the optimal quantity of a good produced by society is less than the amount produced in the private market.
Positive production externality
When the optimal quantity produced by society is more than the quantity produced in the private market.
