Chapter 10 - Markets, contracts And Information Flashcards
Market Failure
When markets allocate resources in a Pareto-inefficient way.
Externality (external effect)
A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in the complete contract.
It is called external effect because the effect in question is outside the contract.
Incomplete Contract
A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).
Asymmetric Information
Information that is relevant to the parties in an economic interaction, but is known by some but not by others.
Verifiable Information
Information that can be used to enforce a contract.
Pigouvian Tax
A tax levied on firms generating negative externalities so as to correct an inefficient market outcome.
MSC
The cost of producing one additional unit of output for individuals both involved in the production process and exterior to it.
MPC + MEC
Positional Good
A good for which one person having more necessarily implies another having less.
(Opposite to public good)
Veblen Effect
People not only care about what they have, but also about what they have relative to what other people have.
Crowding Out
The observed negative effect when economic incentives displace people’s ethical or other-regarding motivations.
Merit Good
Goods that should be available to everyone, independently of their ability to pay.
Patent
A right of exclusive ownership of an idea or invention, which lasts for a specific length of time.
