When a market allocates resources inefficiently, causing a loss in social welfare
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What are externalities?
The cost or benefit a third party receives from an economic transaction
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What are public goods?
Public goods are non-excludable and non-rivalry goods
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What are information gaps?
When two economic agents have differing information when carrying out an economic action
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What are private costs/benefits?
The costs/benefits to the individual participating in the economic action
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What are external costs/benefits?
The cost/benefits to a third party not involved in the economic activity
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What are social costs/benefits?
The costs/benefits to society as a whole
Social costs/benefits = Private costs/benefits + External costs/benefits
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What is a merit good?
A good with external benefits, where the benefit to society is greater than the benefit to the individual
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What is a demerit good?
A good with external costs, where the cost to society is greater than the cost to the individual
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What is marginal private benefit?
Extra gain to the individual from consuming one more unit of a good
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What is marginal social benefit?
Extra gain to society from the consumption of one more unit of a good
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What is marginal social cost?
Extra cost to society from the consumption of one more unit of a good
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What is marginal private cost?
Extra cost to the individual from the consumption of one more unit of a good
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How can the government intervene to ensure the market considers the external costs and benefits?
Indirect taxes imposed onto goods with negative externalities
Subsidies given to producers of goods with positive externalities
Regulations on goods with negative externalities
Provision of goods with positive externalities
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What is the free rider problem?
You cannot charge an individual or individuals a price for providing a non-excludable good as others who use it are free riders gain benefit from it without paying
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What is symmetric information?
Occurs where producers and consumers have access to the same information to make an informed decision
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What is asymmetric information?
Occurs where producers and consumers have access to different information which can lead to the exploitation of an economic party
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Other cards in this set
Card 2
Front
What are externalities?
Back
The cost or benefit a third party receives from an economic transaction
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