2.8 Market failure and externalities Flashcards
Externalities
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
Marginal external benefit
The extra benefit to a third party not involved in the economic activity, per unit consumed
Marginal external cost
The extra cost to a third party not involved in the economic activity, per unit consumed, expressed by: marginal social cost- marginal private cost
Marginal private benefit
The extra benefit to the individual per unit consumed
Marginal private cost
The extra cost to the individual per unit consumed
Marginal social benefit
The extra benefit to society per unit consumed, expressed by: marginal external benefit + marginal private benefit
Marginal social cost
The extra cost to society per unit consumed, expressed by: marginal external cost + marginal private cost
Market failure
When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources
Negative externalities of consumption
Where the social costs of consuming a good are greater than the private costs of producing the good
Negative externalities of production
Where the social costs of producing a good are greater than the private costs of producing the good
Positive externalities of consumption
Where the social benefits of consuming a good are larger than the private benefits of consuming that good
Positive externalities of production
Where the social benefits of producing a good are larger than private benefits of producing that good
