Market Failure Flashcards
Private costs
Costs faced by the producer or consumer directly involved in the transaction
Private benefits
Benefits for producer and/or consumer directly involved in an economic transaction
Externalities
Spill over effects from production/consumption for which no appropriate compensation is paid/received
Social cost
Private cost
+
External cost
Social benefit
Private benefit
+
External benefit
Marginal private cost
Cost to the producer of making an additional unit of output
Marginal external cost
Cost to third parties from production of an extra unit of output
Marginal social cost
Total cost to society of producing an extra unit of output
MSC = MPC + MEC
Marginal private benefit
Benefit to consumers of consuming an additional unit of output
Marginal external benefit
Benefit to third parties from the consumption of extra unit of output
Marginal social benefit
Total benefit to society from consuming extra unit
MSB = MPB + MEB
Shadow pricing
E.g. External cost of road congestion can be calculated by multiplying the number of hours lost by the average wage
Compensation
Estimate the cost of putting right an externality
Revealed preference
How much people are willing to pay to avoid an externality
Private good
RIVAL
EXCLUDABLE
mars bars
Quasi private good
NON RIVAL
EXCLUDABLE
Private beach, satellite tv
Quasi public good
RIVAL
NON EXCLUDABLE
Overuse of natural resources
NHS
Open grazing
Public good
NON RIVAL
NON EXCLUDABLE
Free rider problem
- lighthouse
- street lights
Free rider problem
Build lighthouse, don’t pay because don’t use, when built anyone can use it, no one pays in future
Merit good
Goods/services that are better for people than they realise. Create positive externalities - SOCIAL BENEFIT > PRIVATE BENEFITS
