Chapter 32 - Efficiency And Market Failure Flashcards
Economic Efficiency
Where scarce resources are used in the most efficient way to produce maximum output.
Productive Efficiency
When a firm is producing at the lowest possible cost.
Allocative Efficiency
Where price is equal to marginal cost, firms are producing those goods and services most wanted by consumers.
Marginal Cost
The addition of total cost when making one extra unit of output.
Pareto Optimality
Where it is impossible to make someone better off without making someone else worse off.
Dynamic Efficiency
When Resources are allocated efficiently over time.
Efficiency And Inefficiency
Market failures arise because the free market mechanism is not always efficient in the way in which resources are allocated.
Market Failure Occurance
1) Externalities
2) Merit and Demerit Goods
3) Provision of public and quasi-public goods
4) Information failure
5) Adverse selection or moral hazard
6) Abuse of monopoly
