Section 5: Market Failure Flashcards
What is market failure?
When markets operating without government intervention result in a misallocation of resources.
What is complete market failure?
When the market mechanism does not supply a product even though it would satisfy people’s needs and wants. There is a missing market.
What is partial market failure?
When a market exists and the product is supplied but not at the socially optimal level, too much or too little is supplied.
What is a public good?
A product that is non-rivalrous and non-excludable.
What does non-excludable mean?
When no one can be prevented from consuming the product.
What does non-rivalrous mean?
When the consumption of the product by one or more individuals does not reduce the amount available for others to consume
What is an externality?
The effects that producing and/or consuming a product have on third parties. When the private cost does not equal the social cost, or when private benefit does not equal the social benefit of production and/or consumption.
What is a negative externality?
When the social cost is greater than the private cost of production, or when the private benefit is greater than the social benefit of consumption.
What is a positive externality?
When the social cost of production is less than the private cost, or when the social benefit of consumption is greater than the private benefit.
Positive externalities from production graph.
Negative externalities from production graph.
Positive externalities from consumption graph.
Negative externalities from consumption graph.
What is a merit good?
A product that society judges to be especially worthwhile and is likely to be under consumed because the benefits are not always fully appreciated.
What is a demerit good?
A product that society judges to be undesirable and is likely to be over consumed because the costs are not always fully recognised.
What is a private good?
A product that is both rivalrous and excludable.
What is a quasi-public good
A product that has some but not all of the features of a public good, for example, it might be non-rivalrous but excludable.
What is a free rider?
When an individual is able to consume a product without paying for it.
What is the social cost?
The sum of the private cost and the external cost.
What is the social benefit?
The sum of the private benefit and the external benefit.
