Micro Economics - Market Failure Flashcards
common pool resources
rivalrous - consumption reduces availability for someone else
non-excludable - the resource can be used abundantly without restrictions
examples: fish being over fished, fossil fuels and global warming, timber sales and loss of biodiversity
tragedy of the commons
story of common pool resources
fertile grass is rivalrous because what one animal eats is not available for another
non-excludable because a herder can not exclude animals from eating it
marginal social benefit (MSB)
benefits to society from consuming one more unit of a good
marginal private benefit (MPB)
benefits to consumers for consuming one more unit of a good
marginal social cost (MSC)
costs to society of producing on more unit of a good
marginal private cost (MPC)
costs to producers of producing one more unit of a goos
socially optimum output
MSC = MSB
externality
actions of consumers and producers that give rise to negative or positive side-effects on other people who are not part of these actions, and whose interests are not taken into consideration
unsustainable production
production that uses resources un sustainably - they may be overused, depleted or degraded
sustainable resource
resources are used at a rate that allows them to reproduce themselves and not become degraded or depleted
negative production externalities
external costs created by producers MSC>MPC
Pigouvian tax
imposing a tax on negative production externalities in order to correct the externality. MSC = MPC + tax
Carbon tax
a tax per unit of carbon emissions of fossil fuels, it encourages firms to produce more efficiently
traceable permits
permits that are issued to firms by a government authority or international body and can be traded in the market. the objective is to limit the total amount of pollutants emitted by firms.
collective self governance
a solution to the use of common pool resources where users take control of the resources and use them in a sustainable way (counter idea of the tragedy of commons. it proposes that users of resources can communicate with each other, resulting in rules about the use of resources along with sanctions for violations of the rules
negative consumption externalities
external costs created by consumers MPB>MSB
demerit goods
goods that are considered to be undesirable for consumers, but are over provided by the government
example: cigarettes, alcohol, gambling
positive production externalities
external benefits created by producers MSC
positive consumption externality
external benefits created by consumers MSB>MPB
example: education
merit goods
goods that are held to be desirable for consumers, but which are under provided by the market
public good
non-rivalrous - consumption by one person does not reduce consumption by someone else
non-excludable - it is not possible to exclude someone from using the good
free rider problem of public goods
if it is free, a producer does not receive profit. as a result it is not produced on a free market. it is either produced by direct provision or contracting out
asymmetric information
situations where buyers and sellers do not have equal access to information. in some cases buyers may have more information then sellers, in others sellers may have more information than buyers
it is split into two sections: adverse selection and moral hazard
adverse selection
situation where one party in a transition has more information about the quality of the product being sold than the other party
