Market Failure Chapter

Front 1

Public Goods

Back 1

Two key properties of public goods that make this so are
that people cannot be excluded from consumption and one person’s consumption does not
affect another person’s ability to consume.

Front 2

Negative Externalities

Back 2

A negative externality occurs when an economic activity has a spillover cost on third parties that is not affecting those directly engaging in the activity.

Front 3

Positive Externality

Back 3

A positive externality occurs when an economic activity has a spillover benefit to third parties that is not affecting those directly engaging in the activity.

Front 4

Efficiency with no externalities

Back 4

When every potential buyer whose willingness to pay for a good is at least as much as the marginal cost of producing that good ends up consuming that good. (When MC = MR = P)

Front 5

Efficiency with externalities

Back 5

When every potential buyer whose value for a good is at least as much as the social marginal cost for producing that good ends up consuming it. Addition -- Social.

Front 6

Pecuniary Externalities

Back 6

If a bunch of people buy a product, the price will be pushed outwards, increasing price, and causing a negative externality for other consumers. Every market has this, but it is not an externality that causes inefficiency. Since the impact is embodied only in prices, the price correctly reflects the society-wide impact of market transactions. Pecuniary externalities are actually necessary for efficient markets.

Front 7

Internalizing the externality

Back 7

An agent internalizes an externality when he accounts for the full costs and benefits of his actions.

Front 8

Property Right

Back 8

A property right gives someone ownership of a property or resources.

Front 9

Coase Theorem

Back 9

The Coase Theorem states that as long as property rights are clearly defined, negotiation is possible, and transaction costs are low, bargaining will result in an efficient allocation of resources.

Front 10

Command and Control

Back 10

Command and control is a centralized system of controlling production in which an authority decides the allocation of resources

Front 11

Corrective Tax or Subsidy

Back 11

A government transfer that induces internalization of externalities by market agents.

Front 12

Pigouvian Tax

Back 12

A corrective tax, designed to induce producers of a negative externality to reduce production to the socially optimal level.

Front 13

Non-excludable Goods

Back 13

A non-excludable good is impossible to preclude others from consuming once it is provided.

Front 14

Non-rival Good

Back 14

A non-rival good is a good whose consumption by one person does not preclude consumption by others.

Front 15

Private Provision of Public Goods

Back 15

Private provision of public goods takes place when private citizens make contributions to the production or maintenance of a public good.

Front 16

Common Pool Resources

Back 16

Rival and Non-excludable.

Fish, water, natural forests.

Front 17

Club/Collective goods

Back 17

Non-Rival and Highly excludable

Cable TV, pay-per view TV, Wi-Fi.

Front 18

Public Goods

Back 18

Non-excludable, Non-rival.

National defense, early warning systems.

Front 19

Ordinary Private Goods

Back 19

Rival and Excludable.

Clothes, food, furniture.

Front 20

Tragedy of the Commons

Back 20

The tragedy of the commons occurs because a common resource is used more intensely than all the users would prefer if they could agree to coordinate their actions.