lesson 17 Flashcards
what is a private cost?
cost incurred by those consuming and producing
what is a private benefit?
the benefits received by those consuming and producing
what are the two things the free market are interested in and why?
private costs and benefits
they don’t care
what is a social cost?
the total cost to society, includes private costs plus any external costs (any negative knock on effects)
what is a social benefit?
the total benefits to society, includes both private benefits plus external benefits (any positive knock on effects)
what is an externality?
knock on effects that harms or benefits a third party
why are externalities considered an example of a missing market?
they are produced and received outside the market
how do we model production externalities on a graph?
supply curve
social COSTS are different to private COSTS
how do we model consumption externalities on a graph?
demand curve
social BENEFITS are different to private BENEFITS
what is a demerit good?
they are over provided (over produced and consumed) by the market
what is a merit good?
they are underprovided (under produced and consumed) by the market
when products are overproduced what do we have?
negative externalities
when products are underproduced what do we have?
positive externalities
what is market failure?
when the free market fails to produce the products people want at the right quantities and at the right price which reflects customer satisfaction
what is the public interest theory?
when the government gets involved to encourage the production of goods with positive externalities and discourage the production of goods with negative externalities
