Chapter 8 Flashcards
What is market failure
When the forces of demand and supply do not result an optimum allocation of resources, too much or too little of a good is being consumed
What is the ideal outcome for the society of consuming a good
This is when the marginal benefit of consuming each good matches the marginal cost of producing it
What is information failure
When consumers are not aware of all the information about the product, which would affect their willingness to pay. Lack of information of economic decisions. Of ten caused by lack of education
What are public goods
Goods that because of their characteristics cant be provided by a purely free market
What are merit goods
Goods that are good for society (positive consumption externality), are often under-consumed
What are demerit goods
Goods that are not good for society, are often overconsumed
What are private costs
Costs incurred by an individual (firm or consumer) as part of its production or other economics activities. It determines how much a producer will supply. (could refer to market price)
What are external costs
costs associated with an individual (a firm or household) production or another economic activity, which are borne by a third party and are not reflected in market prices
What are external costs
costs associated with an individual (a firm or household) production or another economic activity, which are borne by a third party and are not reflected in market prices
What are social costs
The sum of private and external costs, shown as the verticle distance between 2 curves, the difference between private and social costs
What are social benefits
The sum of private benefits and external benefits
The extra benefit to society derived per extra unit consumed
Marginal social benefit = marginal external benefit + marginal private benefit
What are private benefits
The benefit received by an individual (a firm or consumer) as part of its economic activity. The consumers are willing to pay determines this.
Alklso could be firms revenue from selling a good
External benefits
The benefits received by society (a firm or household) that accrues to a third party (form or household) not engaged in that economic activity, and which are not reflected in market prices
What is a production externality
An externality that affects the production side of a market, which may be either positive or negative
What is a Negative production externality
MSC > MPC MPB, an example of this is Toxic fumes form burning of coal
What is a Positive production externality
MPC > MSC MSB, an example of this is building a train station which provides shelter for the homeless
What is a Negative consumption externality
MPB > MSB MSC, an example of this is playing loud rock music that stops your neighbours from going to bed
What is a positive consumption externality
MSB > MPB MPC, an example of this is christmas lights outside your house (subjective)
Welfare loss
The social loss incurred when the market equilibrium diverges from the social optimum (MSB = MSC), is often referred to as deadweight loss. You can find this by drawing down from the line with greater value (form new equilibrium) to the line below
Supply always represents …. in externality graphs
MSC MBC, as it talks about costs as that’s what producers infer
Demand always represents …. in externality graphs
MSB MPB, as it talks about benefits and that’s what consumers gain from consuming a product
Information asymmetric
When one individual knows something another does not
What is an externality
An externality is the cost or benefit a third-party receives from an economic transaction outside of the market mechanism. In other other words it is the spill over effect the production or consumption of a good or service.
What are negative externalities caused by
Demerit goods
What are positive externalities caused by
Merit goods
Can the extent to which a market fails be quantified
No its a value judgement and can be subjective to different people
What is marginal social costs
The costs to society in the consumption of one extra unit consumed,
Marginal social cost = Marginal external cost + Marginal private cost
What is the social optimum position
Where MSC = MSB
Government policies for negative externalities
Subsidies for merit goods
Indirect taxes which increase the price of the good to internalise the externality and the polluter pays the damage
Regulation like abbning harmful goods
Provide information to encourage innovation and inform people
Tradable pollution permits
