Market failure Flashcards
What is market failure
A situation in which the free market equilibrium does not lead to a socially optimum allocation of resources
What is an externality
A cost or benefit that is external to a market transaction.
How do externalities lead to market failure
The cost or benefit is not reflected in the market prices. Decisions will not be aligned with the best interests of society.
What is a consumption externality
Externality that affects the consumption side of a market.
Production externality
An externality that affects the production side of a market.
Private cost
A cost incurred by an individual (firm or consumer) as part of its production or other economic activities
External cost
A cost associated with an individuals (firm or households) production or other economic activities. Bourne by a third party.
Social cost
Sum of private and external costs.
Social benefit
The sum of private benefits and external benefits
Private benefit
the benefit from an individuals economic activity that accrue to that individual
External benefit
The benefit that cosiety recieves over and above those that accrue to the individual engaged in an economic activity
What is a private good
A good, that once consumed by one person, cannot be consumed by someone else; rivalrous and excludable
Non excludability
A situation in which it is not possible to provide a product to one person without allowing others to consume
Non rivalry
A situation in which one persons consumption of a good does not prevent others from consuming it as well
Public good
A good that is non rivalrous and non excludable .
