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 an individual as part of its production or other economic activities
Define ‘private benefit’
Benefit incurred from the individual’s economic activity that accuses to that individual
Define ‘external benefits’
Benefits to the third party and is not reflected in the market price, other than consumers and producers trading in the market.
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 internal cost’
The additional cost of producing one extra output to the individual involved in the private transaction
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’
Benefits of consumption to the third party
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.
