Market Failure And Externalities (L17+18) Flashcards
Market failure
Too much/little of a good is produced and consumed compared with the optimal level of output.
When the price mechanism leads to inefficient allocation of resources.
Externalities
Making and consuming some goods / services provides costs/benefits to economic agents that weren’t involved.
Public goods
Some goods would be under provided if public sector wasn’t involved
Information gaps
Some markets have info problems so there can be over/underconsumption
Incur
To experience something (negative) because of your actions
External cost
Cost to third party thats not involved int he making/buying of good/service
External benefit
Benefit to third party thats not involved in the making/buying of a good/service.
Non-rival
Consuming the product doesn’t stop another person from consuming that product like listening to the radio.
Non-excludable
Once good is provided you can’t stop people using it like lighthouses
Free rider problem
Type of market failure as everybody benefits. They might not pay for it but continue to access it so it becomes under provided or not provided at all.
Social benefits
Private benefits + external benefits
Social costs
Private costs + external costs
Posiive externality
Social benefits aren’t private benefits since external benefits are present
Negative externality
Social and private benefits aren’t the same since external costs are present.
Social optimal level
All external benefits and costs are accounted for but firms don’t want to do this.
