Market Failure Flashcards
When does market failure occur?
when there is an inefficient allocation a goods/services in a free market
What are externalities?
when a third party is affected by the actions/decisions of others
What is a private cost?
when an individual is negatively affected by an economic transaction
What is a private benefit?
when an individual is positively affected by an economic transaction
What is a social cost?
when wider society if negatively affected by an economic transaction
What is a social benefit?
when wider society is positively affected by an economic transaction
What is the equation for social costs?
Social costs = Private costs + Negative externalities
What is the equation for social benefits?
Social benefits = Private benefits + Positive externalities
State a merit good and give an example
a good that has a positive externalities and are usually underconsumed in a free market e.g education or health
State a demerit good and give an example
a good that has negative externalities and are usually over consumed in a free market e.g alcohol or fatty foods
When do positive externalities occur?
when the consumption of a product causes a benefit to a third party
When do negative externalities occur?
when the consumption of a product causes a harmful effect to a third party
How can the government decrease demand for demerit goods?
taxes raise the price and discourages consumers from buying
What are subsidies?
an amount of money the government gives firms to lower the average costs of production and the price for consumers
How can the government increase demand for merit goods?
they can provide subsidies for firms that produce merit goods
