Market failure definitions Flashcards
What is allocative Inefficiency?
- When resources are not allocated in the right proportions and the product mix does not match consumers’ tastes.
- It is possible to reallocate resources to make one person better off while not making someone else worse off
What is Allocative/Pareto Efficiency?
- Occurs when resources cannot be readjusted to make one consumer better off without making another consumer worse off.
- There is zero opportunity cost
Define Cost-Benefit Analysis
An analysis done by government which weighs the costs and benefits of a project to determine whether it should be carried out
what are Demerit Goods?
Goods that are seen to be socially harmful e.g. cigarettes, gambling
What are Externalities?
Costs or benefits to third parties which are not included in the market price of a good
Define Maximum Price/ Price Ceiling?
A price set below the market price to make goods affordable
What are Merit Goods?
Goods that are so beneficial to society that every individual should consume them irrespective of their income e.g health care, education
What is Minimum Price/ Price Floor?
A price set above the market price to allow producers to make a fair profit
Define Minimum Wage
- A wage rate set by the government, below which no employer can pay their workers.
- It is set above the equilibrium wage rate
What are Negative Externalities?
- A cost to a third party which is not included in a market price of a good.
- E.g. the harmful effect of a product
Define Non-Excludable Goods
Goods whereby individuals can benefit even if they do not pay for it e.g: the police force
What are Non-Rival Goods?
Goods when consumed by one person will not reduce the consumption by another individual e.g. street lights
Define Positive Externalities
The benefit gained by a third party which is not included in the market price
What is Private benefit?
- The gain a consumer gets from the use of goods
- The gain a producer gets from the sale of a product
Define Private Cost
The actual cost paid by a consumer when a good is purchased. E.g. R150 000 for a car
What is Producer Subsidies?
A cash allowance given to a producer to lower the cost of production and allow more goods to be supplied at a lower price
Define Productive/ Technical Inefficiency.
When resources are not used appropriately to produce the maximum number of goods at the lowest cost and best quality
What are Public Works Programmes?
A government initiative aimed at reducing poverty by creating temporary jobs in areas of infrastructure and other areas
What is SABS – South African Bureau Of Standards?
An institute that monitors the quality of goods in South Africa
Explain Social Benefit
The benefit gained by society from the use of a good or service. E.g. taxpayers pay for the maintenance of roads, society will benefit from fewer accidents. It is calculated by adding the private benefit and external benefit
What is Social Cost?
- The cost of a good or service which is paid by society.
- It is calculated by adding the private cost and external cost.
- E.g. the air pollution caused by cars, will affect people’s health bills
