Midterm 1 (market efficiency and market failure) Flashcards
(37 cards)
Failure to consider external costs/benefits can lead to
market failure
positive externality
the benefit a third party enjoys from a choice they did not help pay for
negative externality
the cost a third party has to pay for a choice they are not directly involved in
MBsocial
(MBprivate + MBexternal)
MCsocial
(MCprivate + MCexternal)
When positive externalities exist, the market equilibrium is inefficient because too ______ is produced, and ______ _____does not reflect the true value of what is produced.
little, market price
when negative externalities exist, the market equilibrium is inefficient because too ______ is produced and the market price is ____ _____
much, too low
when externalities exist, the government intervenes and implements ______________ to stimulate demand for a product.
+: tax credits, subsidies, other incentives
-: excise taxes, regulations, enforcement of property rights, pollution controls, etc.
private goods
rivalry and excludability
public goods
nonrivalry and nonexcludability
when a government uses tax revenue to fund public goods it prevents ____ _____
free riders
the more pollution you clean up, the smaller the _______ _______
marginal benefit
property rights
the exclusive right to determine how a resource is used
Coase Theorem: If a property right is ____________ and transaction costs are ______, resources will naturally gravitate to their _____________ use, regardless of who owns the property right.
well-defined, low, highest-valued
when externalities exist, _________ _________ may be able to _______ the market outcome _________ efficiency and economic ________.
outside intervention, improve, increasing, surplus
when economists do flip analysis of a “bad,” they evaluate:
prevention of the “bad.”
Transaction costs involve the costs in terms of
time, energy, and resources associated with searching out, negotiating, and completing a transaction.
the more prices fall, and the more consumers can buy, the greater the ________ __________.
wealth created
____________ _______ maximizes the number of trades buyers and sellers can make.
equilibrium price
deadweight loss
missing economic surplus
allocative efficiency
marginal benefit = marginal cost, total welfare is maximized
productive efficiency
least-cost production
When the government controls prices, they usually DO/DO NOT use productive or allocative efficiency
do not
Why do price ceilings reduce the amount of wealth created in markets?
Because they reduce the amount of win-win market transactions.
