Chapter 7: Market Inefficiencies Flashcards
the costs or benefits of a market activity that affect a third party
externalities
occurs when there is an inefficient allocation of resources in a market
market failure
the costs of a market activity paid only by an individual participant
internal costs
the costs of a market activity imposed on people who are not participants in that market
external costs
the sum of the internal costs and external costs of a market activity
social costs
occurs when those not directly involved in a market activity experience negative or positive externalities
third-party problem
the price and quantity combination that would exist if there were no externalities
social optimum
what firms do with an externality: when it takes into account the external costs or benefits to society that occur as a result of its actions
internalize
give the owner the ability to exercise control over a resource
property rights
provides an exclusive right of ownership that allows for the use, and especially exchange, of property
private property
states that if there are no barriers to negotiations, and if property rights are fully specified, interested parties will bargain to correct externalities
Coase theorem
occurs when it is possible to prevent customers who have not paid for it from having access to it
excludable good
a good that cannot be enjoyed by more than one person at a time
rival good
has two characteristics: it is excludable and rival in consumption
private good
can be jointly consumed by more than one person, and nonpayers are difficult to exclude
public good
