Market Failure Flashcards
Market failure
When the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss.
External costs
Negative third-party effects outside of a market transaction.
Private costs
Costs internal to a market transaction, which are therefore taken into account by the price mechanism.
External benefits
Positive third-party effects outside of a market transaction.
Private benefits
Benefits internal to a market transaction, which are therefore taken into account by the price mechanism.
Market equilibrium
Where marginal private benefit equals marginal private costs.
Social optimum
When the marginal social benefit equals marginal social cost.
Market failure
When the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss.
Social costs
The sum of external costs and private costs from a market transaction.
Social benefits
The sum of external benefits and private benefits from a market transactions.
Public goods
Those goods that have non-rivalry and non-excludability in their consumption.
Private goods
Those goods that have rivalry and excludability in their consumption.
Information gaps
Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.
Symmetric information
Where consumers and producers have access to the same information about a good or service in the market.
Asymmetric information
Where consumers and producers have unequal access to information about a good or service in the market.
