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market failures occur when

competitive market system under or over allocates resources to production of goods


consumer surplus is the

difference between maximum prices consumers are willing to pay for a product and lower equilibrium price


in order for market to achieve allocative efficiency, need

cosumers' maximum willingness to pay equal producers' minimum acceptable price, sum of producer and consumer suplus to be maximized, marginal benefit of last unit produced equals marginal cost of producing that unit


allocative efficiency occurs only at output where

combined amounts of consumer surplus and producer surplus are maximized


efficiency loss (aka deadweight loss) is measured

as combined loss of consumer and producer surplus


private goods characterized by

rivalry and excludability


bc of free riders, demand for public good

does not get expressed in market, good does not get produced by private sellers


external cost of an actiivty is one that is

borne by those not directly involved


positive externality

some fraction of the benefit of an activity is recieved by ppl not participating in activity


negative externatliy

part of cost of activity falls on ppl no pursuing activity


exisitence of negative externatily will result in

greater than socially optimal level of production


if a good generating negative externatlites were priced to account for spillover costs, then its price would _ and and outputs would ___

increase, decrease


external benefit implies that price of good is _ and external cost implies that price is _ relative to social optimum

too low, too low


external benefit of an actiivty is addeed to private benefits, then the ____

demand curve shifts right


coase theorm

individuals can solve many externalities if they buy and sell the right to generate externality


factors in coase theorm

parties are self interested, potential gain in surplus is high, property rights have already been assigned to one of parties


market failures arise when

d/s dont accuractly reflect all benefits and all costs of production


consumer surplus graphically

under demand curve, above actual price


producer's minimum acceptable price for a particular unit of a good

equals the marginal cost of producing that particular unit


factors that don't necessairily garuntee social optimality

everyone can afford basic necesisties of life, market in equilibrium, collective action has allocated goods


allocative efficiency means that

resources are being devoted to procution of g/s most desired by society


excludability means that

sellers can restrict benefits of a good to those who pay for it


in the case of ____, the market fails to generate the efficient outcome because buyers/ sellers only take their self interests into account

external cost/external benefit


emission fee levied against polluters will tend to

internalize the external cost of pllution


significant spillover costs to society production suggests that

resources are overallocated to industry


when dealing with externalities, government can

correct market failure in both positive and negative externalities by inducing market participants to interliaze the externalitiy


market for pollution rights can be expected to

provide potential polluters with monetary incentive to find ways to reduce emissions


after correcting externality, equilibrium price and qty both rise. the externality was ___

postiive externality


requiring car producers to install emission control devices on cars, gov forces producers to internalize some f the external costs of auto pollution. leads to equilibrium price of cars ___ and qty ___

increasing, decreasing


amrket equilibrium qty is less than socially optimal qty, one infers that

production of good has positive externality