SAC 2 KEY TERMS AND DEFINITIONS Flashcards
Market failure
When there is an over or under allocation of economic resources relative to the socially optimal level.
Can add this leads to the price mechanism not delivering the most desirable outcome
Private costs
The direct and indirect costs that a producer incurs in supplying the market with a product
Social costs
Costs incurred to society, for example the clean up of an oil spill not captured in the private cost of producing oil
Equal to private cost plus external cost
Social benefits
benefits that accrue to society, not captured in the private benefits
Private benefits
Private benefits are what consumers derive from the purchase of a product
Competitive markets
Characterised by low market barriers, products are similar, producers are price takers and there are many sellers in the market
Tragedy of the commons
As fish are non-excludable and rivalrous, anglers have an incentive to catch as much as possible lest their competition catches it all. The result is overfishing and too many resources allocated to present consumption at the expense of future consumption and thus, inter-temporal efficiency decreases.
Free rider problem
Non-excludability causes the ‘free-rider problem’, that is, the problem for firms of people benefiting from their products without paying for them and firms having no way to stop them.
Government failure
When government intervention has unintended consequences, leading to a decrease in the efficiency of resource allocation.
Productivity
Increased outputs for given inputs
Adverse selection
when the offering price attracts only those people who are undesirable
in life insurance include situations where someone with a high-risk job, such as a race car driver or someone who , obtain life insurance without the insurance company knowing that they have a dangerous occupation.
Moral hazard
when the risk taker does not incur the cost of the risk
a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
Inter-temporal efficiency
when the optimal balance of present consumption and future consumption is maintained
Productive efficiency
Minimising inputs and maximising outputs
Dynamic efficiency
When resources are allocated quickly to meet the changing needs of consumers
