Unit 6 - Market Failure and the Role of Government Guide (copy)

Social Efficiency

When resources are allocated effectively, where MSB equals MSC.

Allocatively Efficient Points

Occur in a perfectly competitive market where supply equals demand and marginal benefit equals marginal cost.

Market Failure

Exists when firms produce at marginal private cost equals marginal private cost, and supply equals demand.

Causes of Market Failure

Include market power, asymmetric information, externalities, and insufficient production of public goods.

Externality

An external cost or benefit placed on members of society who did not pay for them, leading to MSB not equaling MSC.

Negative Externality

Occurs when the use of a product decreases the benefit for others, where MSC is greater than MPC.

Positive Externality

Occurs when the use of a product benefits others, where MSC is less than MPC.

Rivalrous Good

A good that cannot be consumed by more than one person at a time, such as food or shoes.

Nonrivalrous Good

A good that can be consumed by multiple people simultaneously, such as national defense.

Excludable Good

A good from which non-payers can be prevented from enjoying benefits, like food or school.

Nonexcludable Good

A good that cannot prevent non-payers from enjoying benefits, such as air or national defense.

Public Goods

Goods that are underproduced due to the freeloader problem, like law enforcement.

Freeloader Problem

Occurs when individuals can enjoy the benefits of a good or service without paying for it.

Government Intervention

Actions taken to correct market inefficiencies, including taxes, subsidies, and regulations.

Price Ceiling

A maximum price set by the government, which can lead to shortages in a perfectly competitive market.

Price Floor

A minimum price set by the government, which can lead to surpluses in a perfectly competitive market.

Income Distribution

Measures the percentage of income received by individuals in different percentiles or brackets.

Lorenz Curve

A graphical representation of income distribution, aiming for closeness to the perfect equality line.

Gini Coefficient

A measure of income inequality, where values closer to 0 indicate more equality and values closer to 1 indicate more inequality.

Progressive Tax

A tax system where higher earners pay a higher percentage, reducing income inequality.