Market failure definitions Flashcards
(15 cards)
Market failure
The failure of the free market to achieve allocative efficiency where too much/too little of a G/S is consumed and produced relative to the socially optimal level where social surplus is maximised
Allocative efficiency
The failure to allocate resources into the production of goods and services that maximises social surplus such that MB is NOT MC
Externalities
The failure to take into account the positive/negative impact on third parties during consumption + production, resulting in over or underallocation of resources
Public goods
The failure of the free market to provide essential goods that are non-rivalrous and non-excludable
MPB
Extra benefit to consumers from the consumption of one more unit of a G/S
MPC
Extra cost to producers from the production of one more unit of a G/S
MSB
Extra benefit to society from the production of one more unit of a G/S
MSC
Extra cost to society from the production of one more unit of a G/S
Deadweight loss
Welfare loss to society as measured by loss of producer + consumer surplus
Merit goods
Goods with external benefits and underconsumed by consumers
Demerit goods
Goods with external costs and overconsumed by consumers
Non-rivalrous
Consumption by one person does not limit consumption by another
Non-excludable
Impossible to exclude non-payers from enjoying the G/S
Common access resources
Are rivalrous but non-excludable; owned by no one but free for all to use
Sustainability
Consumption of resources today does not threaten the ability to produce G/S in the future
