Chapter 9 - Government Intervention Flashcards
What is market failure?
An imperfection in the market mechanism that prevents optimal outcomes
What is the market mechanism?
the use of market prices and sales to signal desired outputs
What does market failure imply?
Forces of supply and demand have not lead us to the best point on the production possibilities curve
What is OPTIMAL MIX OF OUTPUT
the most desirable combination of output attainable with existing resources, technology, and social value
Market failure establishes a basis for _________
government intevention
What are 2 reasons for market failure?
Public Goods
Externalities
What is a public good?
A good or service whose consumption by one person does not exclude consumption by others (ex: street light)
What is a private good?
A good or service whose consumption by one person excludes consumption by others (car, food)
BOTH public and private goods can either be produced by…..
government or private sector
What is a free-rider?
individual who reaps benefits from someone else’s purchase of A PUBLIC good
What are externalities?
costs or benefits of a market activity borne by a 3rd party
market demand does not consider _______
externalities
What is social demand?
includes private benefits AND accounts for externalities
social demand =
market demand + externalities
If the externality is negative, this will impose ________ and market demand will be _____than social demand
if the externality is negative, this will impose external costs and market demand will be greater than social demand
