Chapter 5.2 Flashcards
Market failure
The failure of the market to allocate resources efficiently
Allocative inefficiency
When too much or too little of goods or services are produced and consumed from the point of view of what is most socially desirable
When does an externality occur?
When the actions of consumers or producers give rise to negative or positive side effects on other people who are not part of these actions, and whose interests are not taken into consideration
Positive externality
When the side effects of consumption or production on third parties involve benefits
Negative externality
When the consumption or production of a good involves costs or negative side effects
Socially optimum output
Output that is considered the best situation from the point of view of allocative efficiency
Marginal private costs
Costs to producers of producing one more unit of a good
Marginal social costs
Costs to society of producing one more unit of a good
Marginal prívate benefits
Benefits to consumers from consuming one more unit of a good
Marginal social benefits
Benefits to society from consuming one more unit of a good
When is there allocative efficiency and socially optimum output is produced?
When MSC = MSB
What is the outcome when there is no externality in the competitive free market?
When MPC = MSC = MPB = MSB
What does an externality create?
A divergence between MPC and MSC or MPB and MSB
What does an externality lead to in the free market?
MPB = MPC but MSB isn’t equal to MSC
