2.8 Market failure - externalities and common pool or common access resources

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IB Economics

20 Terms

1

Market failure

occurs due to an inefficient allocation of resources

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2

Marginal private benefit (MPB)

Additional benefits to consumers from an extra unit output.

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3

Marginal social benefit (MSB)

Additional benefits to society from an extra unit of output.

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4

Marginal private cost (MPC)

Additional costs paid by producers from an extra unit of output

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5

Marginal social cost (MSC)

Additional costs paid by society from an extra unit of output.

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6

Marginal external benefit (MEB)

Additional benefits to third parties from an extra unit of output.

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7

Marginal external cost (MEC)

Additional costs to third parties from an extra unit of output.

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8

Positive externalities of consumption

Positive spill-over effects generated to third parties as a result of consuming merit goods.

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9

Merit goods

Goods associated with positive externalities of consumption.

MSB > MPB

<p>Goods associated with positive externalities of consumption.</p><p>MSB &gt; MPB</p>
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10

Positive externalities of production

Positive spill-over effects generated to third parties as a result of production activities.

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11

negative externalities of consumption

Spill-over costs generated to third parties by consumers

during consumption activities.

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12

Demerit goods

Goods associated with negative externalities of consumption. Where MSC> MPC

<p>Goods associated with negative externalities of consumption. Where MSC&gt; MPC</p>
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13

negative externalities of production

Spill-over costs generated to third parties by producers

during production activities.

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14

Carbon tax

Imposed on producers for carbon emissions from production activities with the aim of minimizing environmental pollution.

<p>Imposed on producers for carbon emissions from production activities with the aim of minimizing environmental pollution.</p>
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15

Tradable permits (Cap and trade scheme)

Limits the level of pollutants to a level pre-determined by the government.

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16

Collective self-governance

The voluntary communal actions that combat negative externalities.

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17

Common access resources

Rivalrous and non-excludable resources. (E.g. Clean air, fish stocks and trees)

<p>Rivalrous and non-excludable resources. (E.g. Clean air, fish stocks and trees)</p>
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18

(Non) Rivalrous

Consumption of a resource reduces the amount available for others to use (CAR are scarce)

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19

(Non) Excludable

It is impossible to prevent non-payers from benefitting from the resource (CAR are over-used)

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20

Tragedy of the commons

Where degradation, depletion or destruction of a common access resource is caused by rivalry and over-consumption.

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