market failure definitions

Question 1

market failure

Answer 1

failure of the free market to allocate resources efficiently causing the social surplus to not be maximised

Question 2

overallocation of resources

Answer 2

too many resources allocated to production of a good

Question 3

underallocation of resources

Answer 3

not enough resources allocated to production of a good

Question 4

externalities

Answer 4

actions of consumers or producers give rise to positive or negative side-effects on those not part of the transaction

Question 5

marginal private benefits

Answer 5

benefits to consumers of consuming one ore unit

Question 6

marginal social benefit

Answer 6

benefits to society of consuming one more unit

Question 7

marginal private cost

Answer 7

cost to producers of producing one more unit

Question 8

marginal social costs

Answer 8

cost to society of producing one more unit

Question 9

pigouvian tax

Answer 9

indirect tax to correct negative externality

Question 10

tradable permits

Answer 10

• government gives firms “permits to pollute”
• permits can be traded on the free market

Question 11

negative consumption externalities

Answer 11

negative input imposed to the 3rd parties under consumption without compensating the 3rd parties

Question 12

demerit goods

Answer 12

goods that are undesirable but are over-provided in the market causing negative consumption externalities to be given out

Question 13

merit goods

Answer 13

goods/services which benefit consumers and society but are underprovided by the market
eg. vaccines, education

Question 14

inefficient resource allocation

Answer 14

resources are not allocated to produce goods mostly preferred by the society with the lowest cost, in which total social surplus is not maximised

Question 15

negative production externality

Answer 15

negative impact to the 3rd parties under production without compensating the other parties

Question 16

postive production externality

Answer 16

positive impact to the 3rd parties under production without receiving payment form the 3rd parties

Question 17

public goods

Answer 17

goods that are non-rival and non-excludable in consumption

Question 18

common pool resources

Answer 18

resources that are rival and non-excludable in consumption

Question 19

non-excludable

Answer 19

people will can use it without any restrictions so over-depletion and over use will occur

Question 20

government intervention

Answer 20

involvement or policies adopted by the government in the free market to achieve certain goals

Question 21

free rider problem

Answer 21

one user uses, then others can use without paying

Question 22

subsidy

Answer 22

financial assistance given by the government to firms for lowering production cost and increase outputs

Question 23

positive consumption externality

Answer 23

positive impact to the third parties without receiving payments from the third parties