1.5 The Market Mechanism and Market Failure

What are administrative costs?

Costs that are not directly related to a business operation, such as paperwork.

What does asymmetric information refer to?

When one party knows more or has better information than the other party in a transaction, like a patient and doctor.

What is complete market failure?

Occurs where the market is missing.

Define a demerit good.

A good where production or consumption has a negative impact on the consumer.

What is economic welfare?

The quality of life of the population.

What is the free-rider problem?

Once a public good is produced, there is no way to control who benefits from it.

What is government intervention?

When a government actively intervenes and affects market operation.

What does immobility of factors of production mean?

When it is hard for factors of production to move across different areas within the economy.

What is imperfect information?

When an economic agent does not hold all the necessary information to make an informed decision about a product.

What is an incentive?

Something that motivates an agent in the economy.

Define income inequality.

Differences in size of earnings between households or individuals.

What are market distortions?

Where interference in a market affects behaviour and prices/output.

What is a market economy?

Where output and prices are determined by the workings of supply and demand.

Define market failure.

Where a market leads to a misallocation of resources.

What is a merit good?

A good where production or consumption creates external benefits.

What is meant by misallocation of resources?

Resources are not distributed optimally.

What is monopoly power?

The ability of a firm to be a price maker rather than a price taker; the ability to set prices.

What defines a monopoly?

A market with only one supplier or one dominant supplier.

What is a negative externality?

Where external costs are passed onto third parties through consumption or production of a good.

Define non-excludable goods.

A good or service where you are unable to prevent non-paying consumers from benefiting or using the good.

What does non-rival consumption mean?

Where one person’s consumption of a good or service does not decrease the amount available for consumption by another consumer.

What is a partial market failure?

This is where a market exists but contributes to resource misallocation.

What is a positive externality?

Where a good has positive third-party effects when consumed or produced.

What are price controls?

Government controls on prices, such as maximum or minimum prices.

What does the price mechanism do?

Determines prices through forces of supply and demand.

Define private benefit.

Benefits incurred to the individual through consumption or production.

What is a private cost?

Costs incurred to the individual through consumption or production.

What are public goods?

Goods that benefit and can be used by all members of society.

Define quasi-public goods.

Goods that have characteristics of both public and private goods.

What is rationing?

Limiting the amount or quantity of a good available.

What are regulations?

Laws or rules made by the government and other authorities.

What is signaling in economics?

Where a change in the price of goods or services indicates that supply or demand should be adjusted.

What are social benefits?

The sum of private benefits and external benefits.

What is social cost?

The sum of private costs and external costs.

What does state provision mean?

Where the government provides a good or service.

What are subsidies?

Money given directly to firms by the government so that firms can continue production.

What are unintended consequences?

Actions of people or governments that have consequences which were not anticipated.