Chapter 10: MARKET FAILURE

Question 1

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

Answer 1

public good

Question 2

Use by one person does not reduce availability to others

Answer 2

non-rival

Question 3

A good from which it is impossible to exclude anyone from having access

Answer 3

non-excludable

Question 4

Rival and non-excludable goods

Answer 4

common-pool resources

Question 5

Use by one person reduces availability to others

Answer 5

rival

Question 6

People can be prevented from having access

Answer 6

excludable

Question 7

When people have an incentive to let others pay for a public good

Answer 7

free-rider problem

Question 8

Actions that are not seen by one party; lead to a moral hazard problem

Answer 8

hidden actions

Question 9

Attributes that are not known by one party; lead to adverse selection

Answer 9

hidden attributes

Question 10

When asymmetric information is used and results in a poor selection of goods on the market

Answer 10

adverse selection

Question 11

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)

Answer 11

principal-agent problem

Question 12

When someone is approved to borrow less money than they desire

Answer 12

credit-constrained

Question 13

When someone is not approved to borrow money

Answer 13

credit-excluded

Question 14

When either the buyer, the seller, or both, are less than 100% certain about the qualities of what they are buying and selling.

Answer 14

imperfect information

Question 15

An agreement that functions as a promise of quality

Answer 15

money-back guarantee

Question 16

A promise by the seller to fix or replace a purchased good, at least for a certain time period

Answer 16

warranty

Question 17

When the buyer pays an extra amount and the seller agrees to fix anything that goes wrong for a set time period

Answer 17

service contract

Question 18

Licenses typically issued by government agencies to show that a worker has completed a certain type of education or passed a certain test

Answer 18

occupational licenses

Question 19

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

Answer 19

cosigner

Question 20

Often property or equipment that the bank would have a right to seize and sell if borrower does not repay a loan

Answer 20

collateral

Question 21

Where one party engages in risky behavior because it knows it is protected, so the other party will bear the cost

Answer 21

moral hazard

Question 22

When two parties involved in an economic transaction have an unequal amount of information (one party knows much more than the other)

Answer 22

asymmetric information

Question 23

Markets for certain goods or services that would violate ethical or social norms (e.g., slavery)

Answer 23

repugnant markets

Question 24

Regulatory tools that allocate privileges to firms in order to limit undesirable activity (e.g., polluting)

Answer 24

marketable permits

Question 25

Reduction in marginal external cost (MEC) - profit loss

Answer 25

net social gain

Question 26

net social gain + loss of profits

Answer 26

reservation option

Question 27

A tax or subsidy designed to counteract the effects of externalities

Answer 27

Pigouvian tax/subsidy

Question 28

Laws which specify allowable quantities of pollution and which also may detail which pollution-control technologies companies must use

Answer 28

command-and-control regulation

Question 29

A tax imposed on the quantity of pollution that a firm emits

Answer 29

pollution charge

Question 30

The legal rights of ownership on which others are not allowed to infringe without paying compensation

Answer 30

property rights

Question 31

A liability (cost) of an economic decision that is not specified in a contract; result in overproduction or overuse compared to an efficient outcome

Answer 31

negative external effects

Question 32

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.

Answer 32

external effects

Question 33

Benefits of an economic decision that are not specified in a contract; result in underproduction or underuse compared to an efficient outcome

Answer 33

positive external effects

Question 34

The marginal cost to a decision-maker for engaging in production

Answer 34

marginal private cost (MPC)

Question 35

Costs imposed by decision-maker on society

Answer 35

marginal external cost (MEC)

Question 36

The full cost to society; marginal private cost (MPC) + marginal external cost (MEC)

Answer 36

marginal social cost (MSC)

Question 37

When there is an inefficient allocation or production of goods or services within the market

Answer 37

market failure

Question 38

when contracts cannot specify all possible actions in an enforceable way

Answer 38

incomplete contracts