market failure Flashcards
market failure
The inability of a market to archive allocative efficiency
Externality
This is when the actions of producers and consumers affect third parties that aren’t involved negatively or positively
Positive externality
This when the actions of producers and consumers affect third parties positively
Negative externality
This when the actions of producers and consumers affect third parties negatively
Indirect tax
This is a tax imposed in the price of a good
Carbon tax
This is a tax per unit of carbon emission of fossil fuels.
Sustainability
Sustainability refers to the ability to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.
Demerit goods
This are goods that are considered to be harmful to society
Merit goods
This are goods that are considered to have a positive impact to society
Pigouvian tax
This is a tax on goods with negative externalities and it aligns the private cost with the social cost of a good
tradable permits (cap and trade schemes)
this is when the government decides on what pollution is acceptable and issues permits according to that level.
welfare loss aka deadweight loss
this is the loss of the economy’s efficiency due to misallocation of resources.
Information failure
This is when information is either unavailable, not clear or simply ignored.
Asymmetric information
This is when information isn’t shared equally between two parties ie one party knows more than the other
Adverse selection
This is when one party has more information than the other often leading to negative externalities for the party with the less information eg fast food sellers
Moral hazard
This is when a party takes greater risks because they know the consequences will be bore by another party. eg driving recklessly because you have insurance
overallocation of resources is usually what externality?
negative externality
underallocation of resources is usually what externality?
positive externality
the 3 market based policies are
carbon tax, indirect tax, tradable permits
Marginal private benefit
This is the extra satisfaction got by individuals or firms when consuming more of a good/service
Marginal social benefit
this is the extra satisfaction got by society as a whole when consuming more of a good/service.
Marginal private cost
this is the extra cost got by individuals or firms when more a good/service is produced.
Marginal social cost
this is the extra cost got by society as a whole when more a good/service is produced.
Allocative efficiency
This is a situation when resources are allocated to best meet human needs and want. Eg MSB = MSC