4 - Market Failure Flashcards
Define ‘market failure’
When free market mechanism does not lead to an optimal allocation of resources.
Define ‘externality’
Cost or benefit that is external to the market, thus is not reflected in market prices.
Define ‘private cost’
Cost incurred by producers and consumers directly involved in a market transaction or economic activity.
Define ‘private benefit’
Benefits received by producers or consumers directly involved in a transaction or economic activity
Define ‘external benefits’
Benefits to the third parties who are not part of the market transaction or activity.
Define ‘external cost’
Cost to the third party and is not reflected in the market price, other than the consumers and producers trading in the market.
Define ‘marginal private cost’
The cost to the consumers or producers directly involved in the market transaction or activity from producing an extra output
Define ‘marginal external cost’
Cost to the third party
Define ‘marginal private benefit’
The additional benefit the individual in the private transaction receives from consuming one extra unit.
Define ‘marginal social benefit’
The full benefit to the society for producing an extra unit of the good.
Define ‘public good’
When good is non-excludable and non-rival in consumption.
Define ‘private good’
When good is excludable and rival in consumption.
Define ‘quasi good’
When good is neither completely private nor public good.
Define ‘free rider problem’
When an individual cannot be excluded from consuming a good and thus has no incentive to pay for its provision.
Define ‘asymmetric information’
Situation where some participants in the market have better better conditions than others.
