market failure externalities some other stuff Flashcards
What are two main types of efficiency?
-Productive efficiency
-Allocative efficiency
Define productive efficiency?
Where production takes place using the least amount of scarce resources
When is Allocative efficiency be achieved?
When an economy or firm produces the good or service the consumers want, and therefore resources are used at their best
What necessary conditions are needed for an economy to be allocatively efficient?
- The cost of producing one unit of the good equals the market price of that good.
- An economy would be allocatively efficient if everybody received exactly those goods and services for which they were prepared to pay the market price
Define Allocative efficiency?
Allocative efficiency exists where consumer satisfaction is maximised. Where the quantity supplied equals the quantity demanded and resources are being used most effectively to satisfy consumers wants
What is economic efficiency?
Where both productive and Allocative efficiency are satisfied
Define market failure?
Where the free market mechanism fails to achieve economic efficiency
Give some causes of Market failure?
- Information failure
- Externalities
-Merit and demerit goods
-Public and quasi-public goods
-Over consumption, under consumption
-Over production, under production
-Occupational and geographical immobility of labour (not AS
) -Concentration of power in markets (not AS
) -Distribution of income and wealth and equity (not AS)
Examples of how some markets don’t work very well?
-Constant rising/falling prices -Over production -Under production
Define an externality?
Externalities are spill over effects on third parties arising from production and consumption
Define a negative externality?
An unfavourable spill over effect on third parties arising from production and consumption
What do negative externalities impose on third parties?
External costs
Define a positive externality?
A favourable spill over effect on third parties arising from production and consumption
What do positive externalities impose on third parties?
External benefits
What are private costs?
the cost to the firm from the production of a good or service
What are external costs?
The costs borne by a third party or to society as a whole
What are social costs?
Social cost = Private cost + external cost
They are the full costs to society of the production or consumption of any good.
What are private benefits?
They are benefits that accrue directly to the decision makers
What are external benefits?
They are the benefits accrued to a third party or to society as a whole
What is the social benefit?
Social benefit = Private benefits + External benefits The full benefits to the society of production or consumption of any good
When does a negative externality arise?
When the private costs of an economic activity is greater than the social costs
When does a positive externality arise?
When the social benefit is greater than the private benefit
Define information failure?
Information failure occurs when a lack of information results in consumers and/or producers making decisions that do not maximise their welfare
What can information failure be caused by?
-misleading information
-lack of understanding or awareness among consumers
-persuasive advertising
