chapter 7: market failures

private market

a market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market

private marginal cost

the cost to the producer of an additional unit of a good or service

private marginal benefit

the benefit to the consumer of an additional unit of a good or service

external marginal cost

the cost of an additional unit of a good or service that is imposed on people other than the producer

external marginal benefit

the benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service

externality:

the benefit enjoyed by or cost imposed on a third party not directly involved in the production or consumption of a good or service

market failure

a situation in which a market fails to produce the efficient level of output that maximized total surplus

social marginal cost

the cost to society of producing an additional unit of a good or service; the sum of private marginal cost and external marginal cost

social marginal benefit

the benefit to society of consuming an additional unit of a good or service; the sum of private marginal benefit and external marginal benefit

socially optimal production/consumption

the level of production and consumption of a good or service such that the marginal social benefit is equal to the marginal social cost

positive externality

the unpaid benefit enjoyed by a third party not directly involved in the production or consumption of a good or service

private demand

the demand for a good or service that considers only the private benefits of its consumption

social demand

the demand for a good or service that reflects both the private and external benefits of its consumption

negative externality

the uncompensated cost imposed on a third party not directly involved in the production or consumption of a good or service

private supply

the supply of a good or service that reflects only the private costs of its production

social supply

the supply of a good or service that reflects both the private and external costs of its production

rival

the characteristic of some goods and services whereby the consumption of the good or service by one person reduces the quantity available for consumption by others.

nonrival

the characteristic of some goods or services whereby the consumption of the good or service by one person does not diminish the amount available to someone else.

excludable

a characteristic of some goods or services whereby people can be prevented or excluded from consuming the good or service. sometimes referred to as excludable in consumption

nonexcludable

a characteristic of some goods or services whereby people cannot easily be prevented from consuming the good or service, even if they don’t pay for it. sometimes referred to as nonexcludable in consumption

private good

any good or service that is rival and excludable

public good

any good or service that is both nonrival and nonexcludable

free-rider problem

the idea that when a good is nonexcludable, people will choose to consume the good without paying for it, making it difficult for private companies to profitably provide the good

property right

the exclusive right to determine how a resource is used

market failure

a situation in which a market fails to produce the efficient level of output that maximizes total surplus

coase theorem

if a property right is well defined and transaction costs are low, resources will naturally gravitate to their highest valued use, regardless of who owns the property right

transaction costs

the costs, in terms of time, energy, and resources, associated with searching out, negotiating, and completing a transaction