Midterm 1 (market efficiency and market failure) Flashcards
Failure to consider external costs/benefits can lead to
market failure
positive externality
the benefit a third party enjoys from a choice they did not help pay for
negative externality
the cost a third party has to pay for a choice they are not directly involved in
MBsocial
(MBprivate + MBexternal)
MCsocial
(MCprivate + MCexternal)
When positive externalities exist, the market equilibrium is inefficient because too ______ is produced, and ______ _____does not reflect the true value of what is produced.
little, market price
when negative externalities exist, the market equilibrium is inefficient because too ______ is produced and the market price is ____ _____
much, too low
when externalities exist, the government intervenes and implements ______________ to stimulate demand for a product.
+: tax credits, subsidies, other incentives
-: excise taxes, regulations, enforcement of property rights, pollution controls, etc.
private goods
rivalry and excludability
public goods
nonrivalry and nonexcludability
when a government uses tax revenue to fund public goods it prevents ____ _____
free riders
the more pollution you clean up, the smaller the _______ _______
marginal benefit
property rights
the exclusive right to determine how a resource is used
Coase Theorem: If a property right is ____________ and transaction costs are ______, resources will naturally gravitate to their _____________ use, regardless of who owns the property right.
well-defined, low, highest-valued
when externalities exist, _________ _________ may be able to _______ the market outcome _________ efficiency and economic ________.
outside intervention, improve, increasing, surplus
