ECO207 Chapter 4 - Market Failures Caused by Externalities and Asymmetric Information

direct controls

government policies that directly constrain activities that generate negative externalities

externality

a cost or benefit from production or consumption that accrues to someone other than the immediate buyers and sellers of the product being produced or consumed

market failure

the inability of a market to bring about the allocation of resources that best satisfies the wants of society

moral hazard problem

the possibility that individuals or institutions will behave more recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto others

Pigouvian tax

a tax or charge levied on the production of a product that generates negative externalities; if set correctly, overproduction/overallocation will be offset

private information

facts known by one party to a market transaction but hidden from others; results in asymmetric information