Theme 1 - Market failure (key terms) Flashcards
Public goods
Goods that are non-rivalrous and non-excludable
Non-excludable
When you have produced the good and sold it to one person, it’s impossible to stop other people from using it
Non-rivalrous
This means that as more and more people use the good or service, the amount available to others is not reduced
The free-rider problem
Refers to the tendency for individuals to benefit from a public good or service without contributing to the cost of providing it
Asymmetric information
When one individual or party has more information than another individual or party, and uses that advantage to exploit the other party
Symmetric information
When both consumers and producers have perfect information about the good they are exchanging
Externalities
Third-party effects arising from production and consumption of goods and services for which no compensation is paid
Market failure
Occurs when the market fails to allocate scarce resources efficiently, causing a social welfare loss
Information gap
Exists when the buyer or seller doesn’t have access to the information needed for them to make a fully informed decision
Deadweight loss
The loss in consumer and producer surplus due to an inefficient level of production, perhaps resulting from market failure or government failure
Private costs
These are the costs involved that only affect individuals and firms
External costs
Costs faced by a third party for which no appropriate compensation is forthcoming
Social costs
Private costs + external costs
Private benefits
Rewards to individuals, firms, or consumers from consuming or producing goods and services
External benefits
A benefit to a third party agent arising from production and/or consumption
