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20 Cards in this Set

  • Front
  • Back
market failure
a situation in which the market does not provide the ideal or optimal amount of a particular good
a side effect of an action that affects the well being of 3rd parties
negative externality
exists when a persons or groups action cause a coast to be felt by others
positive externality
exists when a person or group actions cause a benefit to be felt by others
Marginal social costs
marginal social benefits
socially optimal amount
an amount that takes into account and adjusts for all benfits ( external and private). sociall y optimal MSB=MSC
socially optimal amount
efficient amount
no neg or pos externality
MEC=0 and MEB =0; it follows that MSC= MPC and MSB=MPB
neg extern but no pos externality
MEC>0 and MEB= 0; it follows that MSC> MPC and MSB= MPB
pos exter but no negative exer
MEB>0 and MEC=0; it follows that MSB > MPB and MSC = MPC
diagram of a negaive exterbality
downsloping demand curve,
MSC>MPC and the market ouoptu is greater than the socially optimal output.
overproduces and fails

(negative exterbality case)
MSB>MPB and the market ouptut is less than the soically optimal output .

(positive externality case)
internalizing externalities
an externality is internalized if the persons or groups that generated the externality incorporate in to their own private or internal cost-benegit of the external costs that 3rd parties bear.
corrective devices for market failure
taxes and subsidies
internalizing exterbalities is the same as
adjusting for exterbalities
voluntary agreements
externalities can sometime be internalized through individal voluntary agreements
coase theorem
in the case of trivial or zero transaction cost the property rights assignment does not matter to the resource allocative outcome
coast theorem is significant
-it shows that under certain conditions the market can internalize externalities.
-it provides a benchmark for analyzing externality problems-that is its shows what will happen if tranacstion coast are trivial or zero.