Theme 1.3

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Last updated 2:07 PM on 6/10/26
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34 Terms

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Market failure
When the market fails to allocate scarce resources efficiently causing a loss of social welfare
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Externality
A cost or benefit a third party receives outside the market mechanism
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Negative externality
A spillover cost to third parties from production or consumption
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Positive externality
A spillover benefit to third parties from production or consumption
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Under-provision of public goods
When public goods are not provided sufficiently due to the free rider problem
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Public good
A good that is non-rival and non-excludable
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Free rider problem
When individuals benefit from a good without paying for it
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Information gap
When economic agents lack full information to make rational decisions
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Asymmetric information
When one party has more information than the other
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Symmetric information
When buyers and sellers have equal access to information
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Homo economicus
The assumption that consumers and firms make rational decisions with perfect information
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Private cost
Cost to the individual involved in the economic activity
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Private benefit
Benefit to the individual involved in the economic activity
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Social cost
Total cost to society including private and external costs
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Social benefit
Total benefit to society including private and external benefits
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External cost
Cost to a third party not involved in the transaction
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External benefit
Benefit to a third party not involved in the transaction
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Merit good
A good with external benefits that is underprovided by the free market
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Demerit good
A good with external costs that is overprovided by the free market
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Marginal private benefit (MPB)
Extra benefit to the individual from consuming one more unit
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Marginal social benefit (MSB)
Extra benefit to society from consuming one more unit
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Marginal private cost (MPC)
Extra cost to the individual from producing one more unit
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Marginal social cost (MSC)
Extra cost to society from producing one more unit
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Negative production externality
When social costs exceed private costs in production
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Positive consumption externality
When social benefits exceed private benefits in consumption
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Social optimum output
Output where MSB equals MSC
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Welfare loss
Loss of economic efficiency due to misallocation of resources
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Value judgement
A subjective assessment used when estimating externalities
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Government provision
Government directly providing goods with high social benefits
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Provision of information
Government supplying information to reduce information gaps
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Regulation
Government rules to limit harmful behaviour or correct market failure
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Indirect tax
A tax used to internalise negative externalities
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Subsidy
Government payment to encourage goods with positive externalities
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Tradable pollution permits
Allowances that let firms emit a certain amount of pollution