microeconomics market failure key terms Flashcards
market failure
When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity
Complete market failure
A market fails to function at all and a ‘missing market’ results
Partial market failure
A market does function but it delivers the wrong quantity of a good or service which results in resource misallocation
Missing market
A situation in which there is no market because the functions of prices have broken down
Public good
A good such as a radio programme that is non-excludable and non-rival
Private good
A good such as an orange that is excludable and rival
Excludable good
People who do not want to pay can be excluded from benefiting the good
Rival good
When one person consumes a private good the quantity available to others diminishes
Quasi public good
A good which is not fully non-rival and / or where it is possible to exclude people from consuming the product
externality
Knock on effects of economic transactions upon third parties that exist when there is in divergence between private and social costs and benefits
Positive externality
An external benefit of that occurs when the consumption or production of a good causes a benefit to a 3rd party where the social benefit is greater than the private benefit
Private cost
Expenses or costs incurred by an individual or firm in the production or consumption of goods and services
Social benefit
The total benefit of an activity including the external benefit as well as the private benefit. As the equation social benefit = private benefit + external benefit
Private benefit
Personal gains or benefits that individuals or firms receive from the consumption or production of goods and services
Negative externality
An external cost that occurs when the consumption or production of a good causes costs to a third party whether social cost is greater than the private cost
Social costs
The total cost of an activity including the external costs as well as the private cost expressed as an equation social cost= Private cost+ External cost
Information failure
Occurs when people make wrong decisions because they do not process or if they ignore relevant information they are often of myopic / shortsighted about the future
Environmental market failure
Situation where the free market fails to Efficiently allocate resources and address environmental issues
Property rights
the exclusive authority to determine how a resource is used/ Legal rights and ownership that individuals or firms have over assets or resources
Tragedy of the Commons
Shared all common resources overexploited or depleted due to lack of individual responsibility or ownership
Merit good
A good such as health care for which a social benefits of consumption exceed the private benefits. Judgments are involved in deciding that a good is a merit good
Demerit good
Goods such as tobacco for which their social costs of consumption exceed the private costs. Judgments are involved in deciding that a good is a demerit good
Occupational immobility
When workers are unwilling or unable to move from one type of a job to another for example because different skills are needed
Geographical immobility
When workers are unwilling or unable to move from one area to another in search of work
Asymmetric information
When one party to a market transaction possesses less information relevant to the exchange than the othere.g., seller of a second hand car who doesnt disclose all the faults the vehicle has
monopoly
an extreme example of a market structure where only one firm supplies to the market
indirect tax
Expenditure taxes that increase cost of production for firms but can be transferred to consumers via higher prices
subsidy
a money grant to firms by the government to reduce costs of production and encouraging increased output
Minimum price
A fixed price / price floor enacted by the government usually set above the equilibrium price, can distort markets and create excess supply
Maximum price
A fixed price/ price ceiling enacted by the government usually set below the equilibrium market price, Can distort markets by creating access demand
Regulation
rules/ laws enacted by the government that must be followed by the economic agents to encourage a change in behaviour
pollution permits
Market based approach to control pollution Set a limit on the total amount of pollution that can be emitted by various industries these permits can be bought sold or traded amongst these industries
free rider problem
a situation where some individuals benefit from a public good or service without contributing to its cost.
