Market Failure Flashcards
Define a Public Good
A good which exhibits the characteristics of non-excludability and non-rivalry
Define non-excludability
A property of a public good which means that if it is provided for one person, it is provided for all
Define non-rivalry
A property of a public good which means that when a good is consumed by one person, it does not reduce the amount available for others
Define non-rejectability
A property of a public good which means that if the good is provided, it is impossible for a person for a person to ‘opt out’ and not gain benefits
What is the free-rider problem
When people decide to gain the benefits of a good or service while refusing to pay for it.
What is a quasi-public good
A good which has characteristics of both a public and private good
What is an externality
When production/consumption of goods or services imposes external costs or benefits on third parties outside of the market without these being reflected in market prices
What is a negative externality
A cost that is suffered by a third party as a result of an economic transaction
What is a positive externality
A benefit that is enjoyed by a third party as a result of an economic transaction
What is a production externality
When production of a good or a service imposes external costs or benefits on third parties outside of the market without these being reflected in market prices
What is a consumption externality
When consumption of a good or service imposes external costs or benefits on third parties outside of the market without these being reflected in market prices
What is a demerit good
A good for which the private benefits of consumption are greater than the social benefits
Or the long-term private benefits are less than the short term benefits
What is a merit good
A good for which the social benefits of consumption exceed the private benefits and for which the long-term private benefits of consumption are greater than the short-term private benefits
What is moral hazard
The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely
What is adverse selection
A situation in which people who buy insurance often have a better idea of the risks they face than do the sellers of insurance
People who know they face large risks are more likely to buy insurance than people who face small risks
