topic 6 - theme 1 Flashcards
what does market failure mean?
a situation where the free market mechanism does not lead to a socially optimal allocation of resources
what does externality mean?
a third party effect arising from the production or consumption of a good or service
- can be positive or negative
what does private costs mean?
a cost incurred by an individual (firm or consumer) or group of individuals, from production or consumption
what does external costs mean?
the costs/benefits to a third party not involved in economic activity
how do you calculate social costs?
private costs + external costs
what does marginal mean?
the last unit consumed or produced
what is a negative externality?
When the activity of one person or firm has a negative effect on the well-being of a third party
what are some examples of negative externalities? e.g. coal-burning power station
- global warming
- air pollution
what does social costs mean?
cost to society
what is a positive externality?
a benefit received or transferred to a party as an indirect effect of the transactions of another party
what are some examples of positive externalities?
- education
- vaccinations
what does third-party benefits mean?
Positive externalities benefit others who are not part of the consumption decision. These third parties gain from the consumption without having to pay for it.
what is greater, social or private benefit?
social
