Section 5 - Market Failure Flashcards
(37 cards)
Market Failure
When the price mechanism fails to allocate scarce resources efficiently and society suffers as a result
Missing Market
Complete market failure, no market exists
Partial failure
When the market functions, but either the price or quantity supplied of the good/service is wrong
Externalities
The effects that producing or consuming a good/service has on third parties
Third Parties
people who aren’t involved in the making, buying/selling and consumption of good/service
Positive externalities
The external benefits to a third party
Negative externalities
External costs to a third party
Private cost
The cost of doing something to either a consumer or a firm
Social cost
Private + External cost
The full cost borne by society of a good or service.
External costs
Caused by externalities
Private benefit
The benefit gained by a consumer or a firm by doing something
External benefit
Caused by externalities
social benefit
External + Private benefit
The full benefit received by society from a good or service
Marginal private cost (MPC)
The cost of producing the last unit of a good
Marginal Social Cost (MSC)
Marginal private cost + external cost
Marginal private benefit (MPB)
The benefit to someone consuming the last unit of a good
Marginal social benefit (MSB)
Marginal private benefit + External benefit
Overproduction
More is produced than is desirable for society
Underpricing
Sold at a lower price than is desirable for society
Underconsumption
Less is consumed than is desirable for society
Overpricing
Sold at a higher price than is desirable for society
Merit goods
Goods whose consumption is regarded as being beneficial to society
Demerit goods
Goods whose consumption is regarded as being harmful to the people that consume them, but people are usually unaware (don’t care) about the harm that the demerit goods can cause
Public goods
Goods that are consumed collectively
