1.3 market failure

positive externality

a benefit that the third party receives from a transaction, without directly participating in it

negative externality

when the production or consumption of a good or service imposes an uncompensated cost on a third party, not involved in the transaction

private costs/benefits

the costs/benefits to the individual participating in the economic activity

social costs/benefits

the costs/benefits of the activity to society as a whole

demerit good

a good with external costs, where the cost to society is greater than the cost to the individual- tend to be over-provided by the free market

merit good

a good with external benefits, where the benefit to society is greater than the benefit to the individual- tend to be under-provided by the free market

marginal cost/benefit

extra cost/benefit of producing/consuming one extra unit of good

marginal private benefit

the extra satisfaction gained by the individual from consuming one more unit of good

marginal social benefit

the extra gain to society from the consumption of one more good

public goods

a good that is non-excludable and non-rivalrous

non-excludable

cannot stop someone from accessing the good and someone cannot choose not to access the good

non-rivalrous

one person’s use of the good doesn’t stop someone else from using it

quasi-public goods

goods which aren’t perfectly non-rivalrous or non-excludable e.g roads. roads are semi-rivalrous due to congestion

symmetric information

occurs when buyers and sellers have potential access to the same information (perfect information)

asymmetric information

when one party has superior knowledge compared to another- usually the seller has more information than the buyer, and can take advantage of the other party’s lack of knowledge(charging higher prices)

advertising (information gaps)

advertising leads to information gaps at it is designed to change attitudes of the consumers to encourage them to buy the good

subsidy

a payment from the government to a producer to encourage them to produce more of a good or service, or to lower the cost of production