Market Failure

Question 1

Private Cost

Answer 1

All costs which are born by participants of an economic transaction

Question 2

External cost / Negative externality

Answer 2

Any cost imposed on a third party to an economic transaction

Question 3

Social cost

Answer 3

The total cost to society of an economic transaction, including both private and external costs

Question 4

Third-party

Answer 4

Anyone outside an economic transaction (i.e., not the producer or the consumer)

Question 5

Private benefit

Answer 5

Benefits enjoyed by the producer or consumer of an economic activity

Question 6

Social benefit

Answer 6

Total benefits to society of an economic transaction, including both private and external benefits

Question 7

Public good

Answer 7

A good that has the characteristics of non-diminish ability and non-excludability

Question 8

Free-rider problem

Answer 8

Describes a situation in which once a good is provided, non-payers cannot be excluded from enjoying the benefits of it. Thus, there is no incentive to pay, and little ability for a private sector firm to make a profit

Question 9

Quasi-public good

Answer 9

A good that often shows the characteristics of a public good, but has some exceptions

Question 10

Information gaps / information failure

Answer 10

Occurs when buyers and/or sellers do not have all information available when making a decision

Question 11

Asymmetric information

Answer 11

Occurs when one party has access to more information than the other party when decisionmaking