Topic 6 - Market Failure And Externalities Flashcards
(18 cards)
Market failure
Exists any and every time that a free market, left to its own devices and totally free from any form of government intervention, fails to lead to the best, or optimum, allocation of scarce resources.
Productive efficiency
Occurs when an economy’s resources are fully employed. If a market is productively efficient it will be on the PPF curve, it means a market is producing at a maximum output.
Allocative efficiency
Achieved when the product mix reflects consumer tastes and so resources are allocated in the right proportions to producing the different goods and services.
Externality
A cost of benefit that is said to arise if a third party (someone not directly involved in a market transaction) is affected by the decisions and actions (consumption or production) of others, and is thus not reflected in market prices. It is not taken into account by the decision maker.
Consumption externality
An externality that affects the consumption side of a market, which may be positive or negative.
Production externality
An externality that affects the production side of a market, which may be either positive or negative.
Private cost
The cost of an activity to the decision maker (a firm or a consumer) as a result of its production or consumption.
Private benefit
The benefit of an activity obtained by the decision maker as a result of its production or consumption.
External cost
The cost associated with the production of consumption of an individual firm or consumer which is borne by the third party and not taken into account by the decisions maker and is not reflected in market prices.
External benefit
The benefit associated with the production of consumption of an individual firm or consumer which is borne by the third party and not taken into account by the decision maker and so is not reflected in market prices.
Social cost
The total cost of a particular action, and so is private cost plus external cost.
Social benefit
The total benefit of a particular action, and so is private benefit plus external benefit.
Negative externality
If the social costs exceed the private costs, then a negative externality is said to exist. The external costs impact on the third party which is not taken into account by the decision maker. They’re not reflected in the market prices.
Positive externality
If the social benefits exceed the private benefits, then a positive externality is said to exist. The external benefit is not taken into account by decisions maker. The external benefits impact on the third party, and are not reflected in market prices.
Marginal private cost
The cost to the decision maker of producing an extra unit of good
Marginal social cost
The cost to society of producing an extra unit of the good.
Marginal social benefit
The benefit to society from consuming an extra unit of a good.
Marginal private benefit
The benefit to the decision maker from consuming an extra unit of a good.
