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IB Economics
Market failure
occurs due to an inefficient allocation of resources
Marginal private benefit (MPB)
Additional benefits to consumers from an extra unit output.
Marginal social benefit (MSB)
Additional benefits to society from an extra unit of output.
Marginal private cost (MPC)
Additional costs paid by producers from an extra unit of output
Marginal social cost (MSC)
Additional costs paid by society from an extra unit of output.
Marginal external benefit (MEB)
Additional benefits to third parties from an extra unit of output.
Marginal external cost (MEC)
Additional costs to third parties from an extra unit of output.
Positive externalities of consumption
Positive spill-over effects generated to third parties as a result of consuming merit goods.
Merit goods
Goods associated with positive externalities of consumption.
MSB > MPB
Positive externalities of production
Positive spill-over effects generated to third parties as a result of production activities.
negative externalities of consumption
Spill-over costs generated to third parties by consumers
during consumption activities.
Demerit goods
Goods associated with negative externalities of consumption. Where MSC> MPC
negative externalities of production
Spill-over costs generated to third parties by producers
during production activities.
Carbon tax
Imposed on producers for carbon emissions from production activities with the aim of minimizing environmental pollution.
Tradable permits (Cap and trade scheme)
Limits the level of pollutants to a level pre-determined by the government.
Collective self-governance
The voluntary communal actions that combat negative externalities.
Common access resources
Rivalrous and non-excludable resources. (E.g. Clean air, fish stocks and trees)
(Non) Rivalrous
Consumption of a resource reduces the amount available for others to use (CAR are scarce)
(Non) Excludable
It is impossible to prevent non-payers from benefitting from the resource (CAR are over-used)
Tragedy of the commons
Where degradation, depletion or destruction of a common access resource is caused by rivalry and over-consumption.
