Market Failure Flashcards
Definition of market failure
When the market mechanism leads to a misallocation of resources, either completely failing to provide a good/service, or providing the wrong quantity.
Definition of Missing market
When a good is not provided and there is no market for it as the function of prices have broken down
Definition of partial market failure
When a market is left to its own devices would operate to some extent, but not as we would want it to.
Definition of information failure
The ignorance of the true costs or benefits of a product as an indirect does not possess or they ignore the information
Definition of externalities
When economic activity has an effect on a third party
Definition of private cost
The cost incurred by an individual or business in actually consuming or producing a good
Definition of private benefit
The benefit enjoyed by an individual or business in actually consuming or producing a good
Definition of negative externalitie
When the consumption or production of a good causes costs to a third party. When social cost is greater than the private cost
Definition of positive externalitie
When the consumption or production of a good causes a benefit to a third party. Social benefit is greater than the private benefit
Definition of demerit goods
Goods or services whose consumption is considered socially undesirable. Social cost of consumption exceeds private costs
Definition of merit goods
Goods that bring benefits to individual and society, social benefit is greater then private benefit
Definition of social efficiency
The optimal distribution of resources in society, taking into account all external costs and benefits as well as the internal costs and benefits
When does social efficiency occur
When marginal social benefits = marginal social costs
Definition of consumption externality
An externality generated in the course of consuming a good or service
Definition of production externality
And externality generated in the course of producing a good or service
