Chapter 14-Market Failure Flashcards
Third parties
Those not directly involved in producing or consuming a product
Social Benefits
The total benefits of a society to an economy
Social Costs
the total costs to a society of an economic activity
Private benefits
benefits received by those who are directly producing or consuming a product
Private Costs
costs borne by those who are directly producing or consuming a product
External Costs
costs imposed on those who are not involved in the consumption and production activities of others directly. An example of this would be noise pollution, air pollution or water pollution as a result of the production process of the product (If decisions are based only on private costs, there will be overproduction)
External Benefits(Social Benefits)
benefits enjoyed by those who are not involved in the consumption and production activities of others directly. Eg: if a student gets a university degree others will also gain advantages due to quality and quantity of output.
socially optimum output
the level of output where social cost equals social benefit and society’s welfare is maximized. This will not occur when there is a gap between the total effects on society and the effects on those directly producing or consuming the products. If social cost exceeds social benefit society would be better off if less of the given product is produced. (Eg. long car journeys may be more cost effective to the passenger, but would cause more pollution, traffic, etc to everyone else)
Merit Goods
products which the government considers consumers do not fully appreciate the benefits of and will hence be will be under-consumed if left to market forces. Such goods generate positive externalities (Eg: regular medical check ups)
Demerit Goods
products that the government considers consumers do not fully appreciate how harmful they are and will hence be over-consumed if left to market forces. Such goods generate negative externalities. (Eg: cigarattes)
Public good
A product which is non-rival and non-excludable and hence needs to be financed through taxation
Private Good
A product which is both rival and excludable
Monopoly
a single seller
Indicators of Market Failure
shortages, surpluses, high prices, low quality, lack of innovation
Information failure
Information failure is a major factor in market failure. Consumers need to be fully informed about the costs, uses and the nature of products. Workers need to know what jobs are available, the location, qualifications required, wages and the best suited job for their skills. Producers need to know what products are in demand, where good quality materials can be purchased, and the most cost-effective methods of production. Without this information the choices they make wont be in their best interests.
