Market Efficiency 12&16

Question 1

Externality

Answer 1

A cost or benefit that is imposed or bestowed on someone or on some outside group that is external to the transaction. Likely to make things inefficient.

Question 2

Pareto efficiency or optimality

Answer 2

no change is possible that will make some members of society better off without making some other members of society worse off.

Question 3

Public goods/social goods

Answer 3

goods or services that bestow collective benefits on members of society. No one can be excluded from enjoying their benefits. National defense.

Question 4

Sources of market failure

Answer 4

Imperfect markets, public goods, externalities, imperfect information.

Question 5

Marginal social cost

Answer 5

the total cost to society of producing an additional unit of a good or service. Sum of production costs and damage costs.

Question 6

Marginal Private Cost

Answer 6

The amount that a consumer pays to consume an additional unit of a particular good.

Question 7

Marginal damage cost

Answer 7

The additional harm done by increasing the level of an externality-producing activity by one unit.

Question 8

How to internalize externalities

Answer 8

traditionally = taxes and subsidies.

free market radicals = bargaining and negotiation - need to define the rights and there must be no transaction costs.