Market Failure & Externalities Flashcards
Marginal principle
Economic agents may take decisions by considering the effect of small changes from the existing
Marginal utility
The additional utility gained from consuming an extra unit of a good or service
Law of diminishing marginal utility
The more units of a good that are consumed, the lower the utility from consuming those additional units.
(Eg. All you can eat, the more you have the worse it is)
Market failure
Free market mechanism does not lead to an optimal allocation of resources, eg divergence between MSB and MSC
Private cost
A cost incurred by an individual (firm or consumer) as part of its production or other economic activities
External cost
Cost associated with an individuals (firm or households) production or other economic activities, that is borne by a 3rd party
Social cost
Private + external cost
Marginal social cost
The cost to society of producing an extra unit of a good
Private benefit
A benefit gained by an individual as part of its consumption
External benefit
A benefit gained by and individuals consumption, which spills over to a 3rd party
Marginal social benefit
The additional benefit society gains from consuming and extra unit of a good
Externality
A cost or a benefit that is external to a market transaction, and thus is not reflected in market prices
The Marginal Private Cost (MPC) curve is the same as the ____ curve in a free market
Supply
The marginal private benefit (MPB) curve is the same as the _____ curve in a free market
Demand
The shaded area on a negative externalities graph shows a welfare loss, which is
A loss to society caused by ignoring negative externalities
