LS17 - Market Failure & Externality

Question 1

Market Failure

Answer 1

Where too little or too much of a good is produced or consumed compared to the socially optimum level of output

OR

When the price mechanism leads to an inefficient allocation of resources

Question 2

External Cost

Answer 2

Where there is a cost to a third party not involved in the transaction (making or consumption) of a good or service

Question 3

External Benefit

Answer 3

A benefit to a third party that is not involved in the transaction of a good or service