Market failure

Market failure

When supply and demand (a market) operate in an inequitable or inefficient manner

Positive externalities of consumption

Beneficial effects (spillovers) that are enjoyed by a third party when a good is used

Positive externalities of production

Beneficial effects (spillovers) that are enjoyed by a third party when a good is made

Negative externalities of consumption

Harmful effects (spillovers) that are suffered by a third party when a good or service is used

Negative externalities of production

Harmful effects (spillovers) that are suffered by a third party when a good or service is made

Marginal private benefit (MPB)

Amounts that an individual consumer receives from using a good or service

Marginal social benefit (MSB)

The addition of the private benefit and the externalities (spillovers). MSB = MB + Spillovers

Marginal private cost (MPC)

Amounts that an individual firm must pay to produce a good or service

Marginal social cost (MSC)

The addition of the private cost and the externalities (spillovers). MSC = MC + Spillovers

Allocative efficiency

The combined area of consumer surplus and producer surplus is maximised (when the market operates with no market failure/loss of welfare to society)

Deadweight loss

Area of consumer and/or producer surplus (welfare) not transferred to another group

Internalisation

Making the individual/group that produces or consumes a good with externalities responsible for the externality

Government provision

When the state gives out the good or service (eg: state houses)

Regulations

Rules/laws that affect the consumption/production of a good/service

Indirect tax

Payment by firms to the government

Subsidy

Payment by the government to firms

Education

Government spending to increase understanding and change people’s behaviour

Equity

A situation that is fair/just