Market Failure Flashcards
Market Failure
When a market fails to produce efficient outcomes, and in particular does not achieve allocative efficiency
Externalities
costs or benefits of economic activity met by other parties
Positive externalities
Benefits of economic activity that are not accounted for in production costs or price
Negative externalities
Costs of economic activity that are not accounted for in production costs or price
Public goods
Goods and services that everyone can consume at the same time, and are non-rivalrous and non-excludable
Private goods
Goods and services that are excludable and rivalrous and are therefore provided by the market
Rivalry
A good is rivalrous if the use of it by one person prevents the use of another
Excludable
People are excluded from using the good unless they pay a price for it
Merit good
A good with positive externalities that benefit other people
Demerit good
A good with negative externalities that has costs for society
Free riders
Those who benefit from a good or service without paying a share or its cost
Tradable Permits
A process whereby each country is allocated certain levels of pollution. Can be traded
Allocatively efficient output
This occurs where marginal social cost equals marginal social benefit
