MARKET FAILURE Flashcards
what are positive externalities in production?
a positive externality in production occurs when a firm produces a good or service that provides benefits to a third party not involved in the transaction
what are negative externalities in production?
negative externality in production occurs when production activities of a firm impose a cost on the third party
eg. air pollution, methane emissions, noise pollution
what are positive externalities in consumption?
occurs when the consumption of a good or service provides a benefit to a third party who is not involved in the transaction
what is a demerit good?
a demerit good is a good whose consumption is detrimental to society, yet is still over consumed by an individual and therefore is over provided by the market. MPB > MSB
what is social efficiency?
allocative efficiency for society occurs when marginal social benefit (MSB) = marginal social cost (MSC)
what are externalities?
effects in third parties, arising from production and consumption of goods and services that are not factored into the market price.
* includes: negative in consumption, negative in production, positive in consumption and positive in production
what is market failure?
when the free market forces or the forces of demand and supply do not result in an efficient allocation of resources OR the provision of goods by the free market is greater or less than the socially optimal level
what are negative externalities?
a type of externality where the side-effects on the third parties are negative or harmful. there are negative externalities in production (MSC > MPC) and negative externalities in consumption (MSB > MPB)
what are negative externalities in consumption?
a negative externality in consumption occurs when the purchasing decisions made, or activities undertaken by consumers impose external costs on third parties
