Market Failure Flashcards
What is market failure?
When the market fails to allocate resources efficiently
What is complete market failure?
When no market exists, called a missing market
What is partial market failure?
When the market functions, but the price or the quantity supplied is wrong
What are externalities?
The effect of consuming or producing a good or service on third parties who aren’t directly involved in the transaction
What is private cost?
The cost of doing something to either a consumer or firm
What is external cost?
A cost that the company or firms doesn’t pick up
What is the equation for social costs?
Social costs = private cost + external cost
What is private benefit?
The benefit gained by a consumer or firm by doing something
What is external benefit?
A benefit that doesn’t only benefit the consumer or firm
What is the equation for social benefit?
Social benefit = Private benefit + external benefit
Why does market failure occur?
In a free market, the price mechanism will only take into account the private costs and benefits, but not the external costs and benefits
On a negative externalities in production diagram, where is the external cost?
The difference between marginal social cost and marginal private cost
On a positive externalities in consumption diagram, where is the external benefit?
The difference between marginal social benefit and marginal private benefit
What does a negative production externalities diagram look like?
MSC is higher than MPC, both are going in the supply direction, welfare loss pointing left
What does a negative consumption externalities diagram look like?
MPB is higher than MSB, both are going in the demand direction, welfare loss pointing left
