Definitions Flashcards
Government failure
Occurs when intervention leads to a misallocation of resources or a reduction in economic welfare
Regulation
Where government intervenes through legislation
Subsidy
A payment usually from the government to producers, or in some cases consumers, of goods and services
Taxation
Compulsory charges by governments on individuals and firms
Indirect tax
Tax levied on expenditure on goods and services
Direct tax
Tax places on income of the people and firms that cannot be avoided
Public good
A good that is collectively consumes and has the characteristics of non-excludability and non-rivalry
Non-excludability
Situation existing where individual consumers can’t be excluded from consumption
Non-rivalry
Where consumption by one person doesn’t affect the consumption of all others
Free rider
Someone who directly benefits from consumption of a public food but doesn’t contribute towards its provision
Quasi-public good
A good having some but not all of the characteristics of a public good (non-excludable but not non-rivalrous)
Private good
A good that is individually consumed and has the characteristics of excludability and rivalry
Information failure
A lack of information resulting in consumers and producers making decisions that do not maximise welfare
Asymmetric information
Information is not equally shared between two parties. A situation where some participants have better information about market conditions than others
Moral hazard
A situation in which a person who has taken out insurance is prone to taking more risk
Merit good
A good that brings unanticipated benefits to consumers such that society believes it will be under consumed in a free market (PB>SB)
Demerit good
A good where it’s consumption is more harmful than consumers may realise such that it will be over consumed in a free market (PB
Externality
A cost or benefit that is external to a market transaction and is thus not reflected in market prices. Spill over effect where a third party is affected by the actions
Private cost
Cost of an activity incurred to an individual economic unit (consumer or firm) directly involved in a transaction/taking the particular action
Private benefit
Benefit of an activity to an individual economic unit (consumer or firm) directly involved in a transaction/taking the particular action
External cost
Cost of an activity faced by third parties as a consequence of externalities
External benefit
Benefit of an activity faced by third parties as a consequence of externalities
Social cost
Total cost of a particular action (PC+EC)
Social benefit
Total benefits of a particular action (PB+EB)
Market failure
When a free market fails to allocate resources in the most efficient way
Inefficiency
Where economic efficiency is not achieved
Resource allocation
How scarce resources are chosen to produce particular goods and services
