Efficiency and Market Failure Flashcards
productive efficiency
attained when a firm
operates at minimum
average total cost for the particular output, choosing an appropriate combination of inputs (cost efficiency) and
producing the maximum output possible from these inputs (technical efficiency).
allocative efficiency
achieved when society
is producing an
appropriate bundle
of goods relative to
consumer preferences –
this occurs when price
equals marginal cost.
every good or service is produced up to the
point where the last unit provides a marginal benefit to consumers equal
to the marginal cost of producing it.
dynamic efficiency
improving allocative and productive efficiency in the long run through investment in innovation and technological progress
too much focus on short-term static efficiency may result in lost gains in efficiency in the long run
pareto optimality
an allocation of
resources is said to be
a Pareto optimum if no
reallocation of resources
can make an individual
better off without making
some other individual
worse off
market failure
situation in which the price mechanism fails to allocate resources efficiently - the free market equilibrium
does not lead to a socially
optimal allocation of
resources, such that too
much or too little of a
good is being produced
and/or consumed and MB =/= MC
marginal social cost
the cost to
society of producing an
extra unit of a good
marginal social benefit
additional
benefit that society
gains from consuming
an extra unit of a good
externality
An externality exists where the economic agents do not pay all of the costs, or are
unaware of all the benefits. These extra costs or benefits are often to society, rather
than specifically to the agents.
asymmetric information
a situation in which some
participants in a market
have better information
about market conditions
than others
causes of market failure
PIMMFACED
public goods
information failure - AS and MH
monopoly power
merit goods
factor immobility
agriculture
cyclical instability
externalities
demerit goods
pareto optimality vs pareto improvement
- not possible to make someone better off without making someone else worse off
- can occur when resource allocation is NOT pareto efficient as at least one person can be made better off without making anyone else worse off
example of pareto optimality
expanding an airport will benefit passengers with a better experience at the terminals, but will make residents living on the site of the airport worse off as they lose their homes
example of pareto improvement
when operating within PPC, can increase production of BOTH capital and consumer goods without sacrificing any output
