1.5.1 Market failure and externalities Flashcards
What are private costs for a producer of a good or service?
The cost the firm pays to produce the good.
What are private costs for a consumer?
Giving up some of their income in order to consume the product.
What are private benefits for a producer?
The profits made and the fulfilment of entrepreneurial and business objectives.
What are the private benefits for a consumer?
The satisfaction gained by consuming goods and services that satisfy their needs and wants.
What are external costs?
Costs or negative side effects imposed on a third party who is neither the consumer nor the producer
What are external benefits?
Benefits or positive side effects that benefit a third party who is neither the producer nor the consumer
What are social costs?
The total costs of producing goods and services and are calculated by adding together private and external costs.
What are social benefits?
The total benefits of producing goods and services and are calculated by adding together the private and external benefits.
What are externalities?
Positive or Negative effects on third parties
What are negative externalities?
External costs that have a detrimental effect on the lives of people who neither bought or sold the product.
What are positive externalities?
External benefits that are experienced by third parties but paid for by someone else.
What are the strengths of the market economy?
- The profit signalling mechanism leads to an efficient allocation of resources
- Market forces respond to changes in the conditions of demand and supply, adjusting output accordingly and adapting to the needs of consumers
- The allocation of resources reflects both consumers’ choices and production costs.
- Competition can help drive down costs and increase efficiency. That drives down prices and spurs businesses to make better and more innovative products in order to attract sales.
What are the weaknesses of the market economy?
- Market failure occurs whenever social costs exceed social benefits, meaning that there are negative externalities.
- Resources are not being allocated efficiently because consumers do not have to pay for the external costs associated with the goods and services they consume, someone else pays.
- Market forces do not guarantee a reasonable standard of living for all, they are likely to lead to inequality
- some firms acquire market power; some markets will become less competitive and prices will be higher than necessary. The price mechanism will no longer ensure efficiency.
What is under consumption?
This occurs when products that are socially desirable are too expensive for everyone to cover the costs themselves.
What is over consumption?
This occurs when social costs exceed private costs. If consumers had to pay for the external costs as well as the private costs, the private cost would equal the social cost and demand will decrease.
