Market failure and externalities

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12 Terms

1

What are private costs?

Costs directly incurred by producers or consumers, such as rent, wages, and raw materials.

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2

How are social costs calculated?

Social costs = Private costs + External costs.

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3

What are private benefits?

Benefits directly received by consumers or firms, such as revenue from sales or personal satisfaction.

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4

How are social benefits calculated?

Social benefits = Private benefits + External benefits.

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5

What is the social optimum position?

The point where marginal social costs (MSC) equal marginal social benefits (MSB), maximizing welfare.

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6

What is market failure?

When the free market fails to allocate resources efficiently, leading to a loss of social welfare.

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7

What causes market failure?

Externalities, under-provision of public goods, and information gaps.

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8

What is an externality?

A cost or benefit experienced by a third party outside the market transaction.

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9

Why are public goods underprovided in a free market?

Due to the free-rider problem, where people benefit without paying, leading to a lack of profit incentive for producers.

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10

What are the characteristics of public goods?

They are non-excludable (cannot prevent access) and non-rival (consumption by one doesn't reduce availability to others).

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11

What is the free-rider problem?

When individuals benefit from a good without contributing to its cost, leading to under-provision.

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12

How does imperfect information cause market failure?

Consumers and producers make inefficient decisions due to a lack of accurate information, leading to resource misallocation.

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