Market failure KEY TERMS

Question 1

Define Market failure

Answer 1

occurs when the condition for the market is allocatively inefficient, resulting in an over-allocation of resources or an under-allocation of resources.
(marginal social costs do not equal the marginal social benefits)

Question 2

what are externalities

Answer 2

Externalities are any impact that the production or consumption of a good or service has on a third party.

Question 3

what are Negative externalities or external costs

Answer 3

External costs are the spillover costs that negatively impact third parties resulting from producing or consuming a good or service.

Question 4

what are Positive externalities or external benefits

Answer 4

External benefits are the spillover benefits that positively impact third parties as a result of the consumption or production of a good or service.

Question 5

Merit Goods

Answer 5

products that create positive externalities when produced/consumed. MSB > MPB (prod/cons

Question 6

Demerit good

Answer 6

products that create negative spillover effects
to third parties not directly involved.
can be damaging, production/consumption = MSC > MPC

Question 7

what is Definition of tradeable permits

Answer 7

Tradeable permits (cap and trade schemes) involve businesses being issued permits by the government which allow them to emit a certain amount of pollution.

Question 8

Definition of state provision

Answer 8

Governments choose to take the provision of merit goods into the public sector and provide the goods themselves.

Question 9

Definition of a common pool resource

Answer 9

Common pool resources are the natural resources that firms and individuals can access in society without restriction.