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29 Cards in this Set
- Front
- Back
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Market Failure
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A situation in which the market does not allocate resources to their highest valued use (absence of allocative efficiency)
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First and Second Parties
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Buyer and Seller
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Private Costs
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Cost that are born soley by the individuals involved in the transaction.
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Third Party
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People who are not directly involved in a given economic transaction. Third parties are affected when there are externalities.
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Social Cost
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The Total cost of a transaction, the private cost plus the external costs
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Social Benefits
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The total social benefits derived from consuming a good, including the benefits to those who to NOT purchase the good
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Socially Optimal Equilibrum
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Where the social cost of the last unit produced = social benefit. This produces allocative efficiency.
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Market Equilibrium
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Where supply = to demand. No shortages and no surplus
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Dead Weight Loss
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The loss of consumer and or producer surplus that comes with an inefficient economic outcome.
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Positive Externality
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When consumption of a good positively effects a third party.
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Merit Good
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A good that has been deemed socially desirable throught the political process. (IB Use: Good that has positive externalities)
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Negative Externality
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When consumption of a good negatively effects a third party
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DeMerit Good
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A good that has been deemed socially undesirable through the poltiical process. (IB Use: A good that has a negative externality)
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Private Goods
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A good that is consumed by only one individual at a time. These are subject to the principal of rival consumption and are excludable.
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Public Goods
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Goods for which consumption is non-rival and non-excludable.
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Non rival
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One persons consumption of a good does NOT reduce the amount of a good available to others. "Shared consumption"
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Non-excludable
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No one can be stopped from consuming a good once it has been provided to one person, even if other people have not paid for it.
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Government Goods
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Government goods—Goods provided by governments, which may be private or public goods. Note: Often these goods require large investments and do not show a profit for a very long time.
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Time Horizons
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The period of time until which a person is willing to wait for a reward. Markets often fail to provide goods which have long time horizons.
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Limited Information
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When both parties to a sale do not have equal access to full information about a product. When this is the case, the market price will not be socially optimal.
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Free Rider
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A consumer who enjoys the benefit of a good or servcie without paying for that good or service.
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Sucker
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A person who unilaterally providies (pays for) a public or government good.
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Market Solution
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Using markets to solve an economic problem, such as negative externalities. IN such a solution, the forces of supply and demand (the invisible hand) are still allowed to function. For example, the use of effluent fees or marketizing pollution rights.
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Non-Market Solution
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Using non-market solutions, such as government rules which regulate or ban the use of goods with negative externalities, to solve an economic problem. Such solutions disregard the forces of supply and demand.
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Effluent Fee/Pigouvian Tax
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A charge to a polluter that gives the right to discharge into the air or water certain amounts of pollution. Also called a "pollution tax" or "Pigovian tax"
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Property Rights
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Ownership of a resource as specified and protected in law
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Government Failure
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the public sector analogy to market failure that occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention.
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Coase Theorm
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The problem of negative externalities will solve itself if property rights are clearly defined and people are allowed to negotiate.
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Privatization
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Taking government assetts and selling them to privatre individuals or companies. A possible solution to government failure.
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