Chapter 10: MARKET FAILURE Flashcards
A good where the positive externalities are so extensive that private firms could not expect to receive any of the social benefits; it is non-rival and may or may not be excludable
public good
Use by one person does not reduce availability to others
non-rival
A good from which it is impossible to exclude anyone from having access
non-excludable
Rival and non-excludable goods
common-pool resources
Use by one person reduces availability to others
rival
People can be prevented from having access
excludable
When people have an incentive to let others pay for a public good
free-rider problem
Actions that are not seen by one party; lead to a moral hazard problem
hidden actions
Attributes that are not known by one party; lead to adverse selection
hidden attributes
When asymmetric information is used and results in a poor selection of goods on the market
adverse selection
The conflict of interest that occurs when a principal and agent both want something from one another (e.g., an employer and an employee; an insurance company and a buyer of insurance)
principal-agent problem
When someone is approved to borrow less money than they desire
credit-constrained
When someone is not approved to borrow money
credit-excluded
When either the buyer, the seller, or both, are less than 100% certain about the qualities of what they are buying and selling.
imperfect information
An agreement that functions as a promise of quality
money-back guarantee
A promise by the seller to fix or replace a purchased good, at least for a certain time period
warranty
When the buyer pays an extra amount and the seller agrees to fix anything that goes wrong for a set time period
service contract
Licenses typically issued by government agencies to show that a worker has completed a certain type of education or passed a certain test
occupational licenses
Another person or firm who legally pledges to repay some or all of the money from a loan if the original borrower does not do so
cosigner
Often property or equipment that the bank would have a right to seize and sell if borrower does not repay a loan
collateral
Where one party engages in risky behavior because it knows it is protected, so the other party will bear the cost
moral hazard
When two parties involved in an economic transaction have an unequal amount of information (one party knows much more than the other)
asymmetric information
Markets for certain goods or services that would violate ethical or social norms (e.g., slavery)
repugnant markets
Regulatory tools that allocate privileges to firms in order to limit undesirable activity (e.g., polluting)
marketable permits
Reduction in marginal external cost (MEC) - profit loss
net social gain
net social gain + loss of profits
reservation option
A tax or subsidy designed to counteract the effects of externalities
Pigouvian tax/subsidy
Laws which specify allowable quantities of pollution and which also may detail which pollution-control technologies companies must use
command-and-control regulation
A tax imposed on the quantity of pollution that a firm emits
pollution charge
The legal rights of ownership on which others are not allowed to infringe without paying compensation
property rights
A liability (cost) of an economic decision that is not specified in a contract; result in overproduction or overuse compared to an efficient outcome
negative external effects
The effects of an economic decision on a third party who is outside of the exchange; effects are not specified as benefits or liability (cost) in a contract. Also called a spillover.
external effects
Benefits of an economic decision that are not specified in a contract; result in underproduction or underuse compared to an efficient outcome
positive external effects
The marginal cost to a decision-maker for engaging in production
marginal private cost (MPC)
Costs imposed by decision-maker on society
marginal external cost (MEC)
The full cost to society; marginal private cost (MPC) + marginal external cost (MEC)
marginal social cost (MSC)
When there is an inefficient allocation or production of goods or services within the market
market failure
when contracts cannot specify all possible actions in an enforceable way
incomplete contracts
