Chapter 5: Market Failures - Public Goods And Externalities

Front 1

market failures

Back 1

Occurs when the competitive market system produces the "wrong" amounts of certain goods or services, or fails to provide any at all

Front 2

Demand-side market failures

Back 2

Occur because there are situations where it is impossible to charge all consumers, or any consumers, the price that they are willing to pay.

Front 3

Supply-side market failures

Back 3

Occur because there are extra costs associated with producing the good, but the extra costs are not reflected in the supply.

Front 4

consumer surplus

Back 4

When the consumers' utility exceeds the price paid, consumer surplus is generated. You received a consumer surplus anytime you are willing to pay a higher price, but paid a much lower price.

Front 5

producer surplus

Back 5

When producers receive a price greater than their marginal cost, producer surplus is created.

Front 6

efficiency losses

Back 6

efficiency losses (or deadweight losses) are reductions of combined consumer surplus and producer surplus.

Front 7

private goods

Back 7

Private goods are produced for the market because they have a rivalry (one's use of a good makes it unavailable for others) and come in units small enough to be afforded by individual buyers. Private goods are subject to excludability: the idea that those unable and unwilling to pay do not have access to the benefits of the product.

Front 8

public goods

Back 8

Public or social goods would not be produced to the market because they possess the characteristics of non-rivalry and non-excludability.
Non-rivalry means that when one consumes the good, this does not preclude another from consuming the same good.
Non-excludability means that no one can be prevented from enjoying the benefits of a public good.

Front 9

cost benefit analysis

Back 9

Government use a cost-benefit analysis which is a practical way to decide whether to produce a good and how much to produce. Government might use this method in determining whether or not to build a new highway.

Front 10

quasi-public goods

Back 10

quasi-public goods are those that have large positive externalities so government will sponsor the provision. Otherwise, if there are produced in the private market that would be under produced.

Front 11

positive externality

Back 11

Positive externalities occur when a third person, or persons, is affected by the transaction in a positive way. The good is under produced when positive externalities are present. The equilibrium output will be smaller than the efficient output because the consumer is willing to pay a price equal to the consumers' individual marginal benefit, but no more.

Front 12

negative externality

Back 12

Negative externalities occur when the third person, or persons, external to the transaction is affected from the transaction in a negative way. The good is overproduced and the equilibrium output will be greater than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more of a lower price than the efficient level which would exist if true costs were reflected in the production decision

Front 13

Coase theorem

Back 13

The Coase theorem suggest that under the right conditions private bargaining consult externality problems, the us government intervention may not always be necessary. Government can have a role in the economy to correct externalities. This is not easy; it is time consuming and costly. There is always the change that a government failure may occur.