chapter 14- market failure Flashcards
definition of market failure
occurs when the market forces of demand and supply are unsuccessful in allocating resources efficiently and cause external costs or external benefits.
definition of private costs
private costs of production and consumption are the actual costs of a firm, individual or government.
definition of external costs
external costs are the negative side effects of production or consumption incurred by third parties for which no compensation is paid.
calculation of social costs
social costs = private costs + external costs
definition of social costs
social costs are the true costs of consumption or production to society as a whole.
e.g. the sum of private costs and external costs
examples of external costs
pollution
cigarette smoke
advertising clutter
litter
definition of private benefits
private benefits are benefits of production and consumption enjoyed by a firm, individual or government.
definition of external benefits
external benefits are the positive side effects of production or consumption experienced by third parties for which money is paid by the beneficiary.
definition of social benefits
social benefits are the true benefits of consumption or production
e.g. sum of private benefits and external benefits
how is social benefit calculated
social benefits = private benefit + external benefit
definition of public goods
public goods are goods and services that are non excludable and non rivalrous, and which are a cause of market failure as there is a lack of a profit motive to produce them.
definition of merit goods
merit goods are goods or services which when consumed create positive spillover effects in an economy.
