1.5.1 Market Failure & Externalities Flashcards
(22 cards)
What are private costs
Rent, cost of machinery & labour, insurance, transport & paying for raw materials
What are social costs
Private costs + external costs
What are external costs
Private costs - social costs
What are private benefits
the benefits received by producers or consumers directly involved in a transaction or economic activity
What are social benefits
Private benefits + external benefits
What are external benefits
Private benefits - social benefits
External costs of production:
When does external costs occur
When a good is being produced or consumed, such as pollution
When negative externalities are ignored what does it lead to
Over- provision & under- pricing
Negative externalities are shown by
MSC > MPC
What is known as the area of DEADWEIGHT WELFARE LOSS
Social costs > private benefits
External benefits of production:
What is an example of an external benefit from the production/ consumption of a good/service
The decline of diseases/ healthier lives of consumers from vaccination programmes
Since consumers/producers do not account for vaccinations programmes what does this mean
That they are under provided & under consumed in the free market
What leads to market failure
MSB > MPB
What does it mean if the excess of social benefits is over costs
Welfare gain
When does markets work well
When the private & social benefits exceed ( or are equal to) the private & social costs
What is social optimum position
MSC = MSB & it is the point of maximum welfare
When does market failure occur
When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources
What is an externality
The cost/ benefit a 3rd party receives from an economic transaction outside of the market mechanism
What does it mean that public goods are non-excludable
By consuming the good, someone else is not prevented from consuming the good aswell
What does it mean by a free- rider
People who do not pay for the good still receive benefits from it, in the same way that people who do pay for it do
What are private goods
Rival & excludable
E.g. property rights can be used to prevent others from consuming the good
What does information gaps mean
It is assumed that consumers/producers have perfect information when making economic decisions. This rarely the case.
