T1.3: Externalities, Market Failure, Marginals And Social Welfare Flashcards
Externalities
Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.
Information gap
when either the buyer or seller does not have access to the information needed for them to make a fully informed decision.
Market failure
when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits to society as a whole.
Public goods
Pure public goods are non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person
- classed as non-excludable
Deadweight loss
- loss in producer and consumer surplus due to inefficient production levels —> perhaps market failure or government failure
External benefit
A benefit to a 3rd party agent arising from production and/or consumption.
External costs
External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air and noise pollution is a difficult exercise - but one that is important for economists concerned with the impact of economic activity on our environment.
Externalities
third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.
Marginal external benefit (MEB)
Benefit to third parties from the consumption of extra unit of output.
Marginal external cost (MEC)
Cost to third parties from the production of an additional unit of output.
Marginal private benefit (MPB)
Benefit to the consumer of consuming an extra unit of output.
Marginal private cost (MPC)
Cost to the producing firm of producing an additional unit of output.
Marginal social benefit (MSB)
Total benefit to society from consuming an extra unit, MSB = MPB + MEB.
Marginal social cost (MSC)
Total cost to society of producing an extra unit of output. MSC = MPC + MEC.
Negative externality
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs.
Net social benefit
A measurement of the net impact of an investment project found by estimating the social costs and benefits —> considered by a government when deciding which project(s) offers best potential return
Positive externalities
exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research.
Private benefit
The rewards to individuals, firms or consumers from consuming or producing goods and services. Also known as internal benefit.
Private cost
Costs of an economic activity to individuals and firms. Also known as internal costs.
Social benefit
The benefit of production or consumption of a product for society as a whole. Social benefit = private benefit + external benefit.
Social cost
The cost of production or consumption of a product for society as a whole. Social cost = private cost + external cost.
Social efficiency
The socially efficient output is where Social Marginal Cost (SMC) = Social Marginal Benefit (SMB).
Spill-over effects
External effects of economic activity, which have an impact on outsiders who are not producing or consuming a product – these can be negative (creating external costs) or positive (creating external benefits).
Excludability
Property of a good whereby a person can be prevented from using it if they do not pay.
Free rider problem
public goods are non-excludable it is difficult to charge people for benefitting once a product is available. The free rider problem leads to under- provision of a good and thus causes market failure. Free riders have no incentive to reveal how much they are willing and able to pay for a public good because they can enjoy benefit without paying.
