Market Failure Flashcards
Productive Efficiency
When a firm reaches the lowest point on its average cost curve (lowest unit cost)
Allocative efficiency
When firms take in consumer preferences into account for their production
Social efficiency
Optimal distribution of resources in society, taking into account all externalities
Dynamic efficiency
Focuses on the development in choice through innovation
Pareto efficiency
No one can be made better off without making someone worse off
Market failure
When market is unable to allocate resources to meet needs of society
Partial market failure
Market exists but there is a misallocation of resources (supplied in wrong amounts)
Negative externalities
Positive externalities
Costs suffered by a third party outside the price mechanism
Benefits incurred to a third party outside the price mechanism
Example of negative externalities in production and consumption.
Factory giving off pollution.
Second hand smoke
Merit good
Demerit good
Goods that would be underconsumed in a free market as full benefits not realised or appreciated. E.g education
Goods that would be over consumed in a free market as full cost is ignored/not realised e.g smoking
Free good
Goods with no opportunity cost e.g air
Public good
Possesses non-excludability and non rivalry in consumption
Why would public goods not be provided in a free market?
Government pay for them
Quasi public good
Possesses some qualities of a public good e.g park, non rival as people may be using a swing, limits your consumption
Non rival and non excludable
Non rival- consumption by one cannot restrict consumption for another
Non excludable- cannot stop someone else from using it (not solely refined to ones who have payed for it)
