Chapter 5- Market Failures: Public Goods and Externalities

Question 0

Demand-side market failures

Answer 0

Underallocations of resources that occur when private demand curves understate consumers’ full willingness to pay for a good or service.

Question 1

Market failures

Answer 1

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.

Question 2

Supply-side market failures

Answer 2

Overallocations of resources that occur when private supply curves understate the full cost of producing a good or service.

Question 3

Consumer Surplus

Answer 3

The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.

Question 4

Producer Surplus

Answer 4

The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.

Question 5

Efficiency Factors (or deadweight losses)

Answer 5

The capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors (of growth) make possible.

Question 6

Private Goods

Answer 6

A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.

Question 7

Rivalry

Answer 7

(1) The characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit.

Question 8

Excludability

Answer 8

The characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good.

Question 9

Public Goods

Answer 9

A good or service that is characterized by nonrivalry and nonexcludability; a good or service with these characteristics provided by government.

Question 10

Nonrivilary

Answer 10

The idea that one person’s benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.

Question 11

Nonexludability

Answer 11

The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good.

Question 12

Free-rider problem

Answer 12

The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.

Question 13

Cost-benefit analysis

Answer 13

A comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.

Question 14

Quasi-public goods

Answer 14

A bank that is privately owned but governmentally (publicly) controlled; each of the U.S. Federal Reserve Banks.

Question 15

Externality

Answer 15

A cost or benefit from production or consumption, accruing without compensation to someone other than the buyers and sellers of the product (see negative externality and positive externality).

Question 16

Coase Theorem

Answer 16

The idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations of the affected parties.

Question 17

Optimal Reduction of an externality

Answer 17

The reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.